Today’s data from the Office for National Statistics show the chancellor has narrowly avoided the ignominy of presiding over a triple-dip recession in the UK. Real GDP, which had contracted by 0.3 per cent in the final quarter of 2012, is reported to have increased by the same amount in the first quarter of this year. Growth in the service sector was more than sufficient to offset another fall in activity in the construction sector.
While attention around the release of this growth number has naturally focused on whether or not there would be a triple-dip, we should not forget the bigger picture: the UK economy is stuck in a rut. Real GDP has increased by just 0.4 per cent in total over the last two and a half years and it remains 2.6 per cent below its peak level, reached five years ago in the first quarter of 2008. Normally, we would expect the economy to grow by around 12 per cent over any five-year period. The fact that it has contracted by 2.6 per cent instead means almost 15 per cent of potential output has been lost, along with the employment opportunities and tax revenues that would have accompanied it.
In most circumstances, presiding over such a dismal economic outcome would be severely damaging to a government’s standing, but this has not been the case for the coalition for two reasons.
First, the employment and unemployment data have been far better than would normally be expected, given the weakness of the economy. True, unemployment has increased by 108,000 over the last two and a half years, but history would have pointed to a much bigger decline when output was almost stagnant, and employment is up by 570,000 over the same period. The employment data have given the government something positive to point to in the face of criticism of its economic policies. However, if the latest data, which show a 70,000 increase in unemployment and a 2,000 drop in employment over the latest quarter, are the start of a new trend, the government will find it harder to defend its economic track record in the future.
Second, the government continues to frame the UK’s economic crisis as a “public debt problem” rather than a “growth problem.” This enables it to blame the last Labour government for the continuing crisis. It also allows the government to stick with the fiscal plan it devised to deal with the deficit and debt, in the face of calls from previous supporters like the IMF for a change of policy and evidence that the plan is not working even on its own terms. ONS data show public sector net borrowing in 2012/13 was—after allowing for special factors—£120.6bn, almost identical to borrowing of £120.9bn in 2011/12.
Rather than change its fiscal policy, the government continues to rely on monetary measures to get the economy growing again, despite the evidence of the last few years suggesting that they are largely ineffectual. Much hope is being pinned on the arrival of Mark Carney as the new governor of the Bank of England in July, though little is said about what he might actually do. Even if he could cajole two more members of the Monetary Policy Committee into voting for an increase in the scale of the bank’s quantitative easing programme (Mervyn King has been in a minority of three on the nine-man committee voting for an increase in recent months), we have probably reached the point where additional QE is producing much-diminished returns.
Alternatively, he might make the case for QE being used to buy assets other than government debt, such as corporate bonds. But yields on these assets are already at historically low levels and the effect on companies’ investment plans of a further fall is likely to be small. Only if he comes up with something truly radical, such as using additional QE to directly increase demand in the economy, will Carney make a difference.
Otherwise, with the government not prepared to change fiscal course, the eurozone economy in recession as a result of fiscal austerity and consumers in the UK still squeezed by inflation running well ahead of wages, the economy is likely to remain stuck in its current rut for some time to come.
While attention around the release of this growth number has naturally focused on whether or not there would be a triple-dip, we should not forget the bigger picture: the UK economy is stuck in a rut. Real GDP has increased by just 0.4 per cent in total over the last two and a half years and it remains 2.6 per cent below its peak level, reached five years ago in the first quarter of 2008. Normally, we would expect the economy to grow by around 12 per cent over any five-year period. The fact that it has contracted by 2.6 per cent instead means almost 15 per cent of potential output has been lost, along with the employment opportunities and tax revenues that would have accompanied it.
In most circumstances, presiding over such a dismal economic outcome would be severely damaging to a government’s standing, but this has not been the case for the coalition for two reasons.
First, the employment and unemployment data have been far better than would normally be expected, given the weakness of the economy. True, unemployment has increased by 108,000 over the last two and a half years, but history would have pointed to a much bigger decline when output was almost stagnant, and employment is up by 570,000 over the same period. The employment data have given the government something positive to point to in the face of criticism of its economic policies. However, if the latest data, which show a 70,000 increase in unemployment and a 2,000 drop in employment over the latest quarter, are the start of a new trend, the government will find it harder to defend its economic track record in the future.
Second, the government continues to frame the UK’s economic crisis as a “public debt problem” rather than a “growth problem.” This enables it to blame the last Labour government for the continuing crisis. It also allows the government to stick with the fiscal plan it devised to deal with the deficit and debt, in the face of calls from previous supporters like the IMF for a change of policy and evidence that the plan is not working even on its own terms. ONS data show public sector net borrowing in 2012/13 was—after allowing for special factors—£120.6bn, almost identical to borrowing of £120.9bn in 2011/12.
Rather than change its fiscal policy, the government continues to rely on monetary measures to get the economy growing again, despite the evidence of the last few years suggesting that they are largely ineffectual. Much hope is being pinned on the arrival of Mark Carney as the new governor of the Bank of England in July, though little is said about what he might actually do. Even if he could cajole two more members of the Monetary Policy Committee into voting for an increase in the scale of the bank’s quantitative easing programme (Mervyn King has been in a minority of three on the nine-man committee voting for an increase in recent months), we have probably reached the point where additional QE is producing much-diminished returns.
Alternatively, he might make the case for QE being used to buy assets other than government debt, such as corporate bonds. But yields on these assets are already at historically low levels and the effect on companies’ investment plans of a further fall is likely to be small. Only if he comes up with something truly radical, such as using additional QE to directly increase demand in the economy, will Carney make a difference.
Otherwise, with the government not prepared to change fiscal course, the eurozone economy in recession as a result of fiscal austerity and consumers in the UK still squeezed by inflation running well ahead of wages, the economy is likely to remain stuck in its current rut for some time to come.
