Policy Research in Macroeconomics

Can Britain’s “recovery” be sustained?

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All around there are signs of recovery. One can almost hear the sound of champagne bottles popping and fireworks crackling in the Westminster village. Indicators are improving. Commentators are reassessing the chancellor, whose reputation for economic management had plunged, causing his stock to fall amongst his Conservative colleagues. Now they can’t resist giving him a positive ‘thumbs up’.

Fair do. Britain is emerging from the longest slump in more than a century. So good news is welcome, and a little cheer is in order.

But we have been here before. Indeed there have been ‘green shoots’ and other signs of recovery since 2009 – when Labour’s chancellor, Alastair Darling was still in charge.

At the end of 2009 the economy grew at 0.7% as families appeared to start spending again. The savings ratio dropped for the first time in over a year but many analysts speculated that was only because consumers had gone on a spending spree before Alastair Darling hiked VAT from 15% to 17.5%.

In September, 2009 I was interviewed by the Times newspaper, who headed the interview: “Worst is yet to come, says economist”.

“The economy is no longer in freefall” I am quoted as saying “and, as a result, there’s an enormous amount of complacency from politicians, in particular, about what will happen next. I believe politicians have given away the opportunity to restructure the banks and reconfigure the system.”

The Times continued:

“(Pettifor) highlights an admission by the Treasury that one company in three is paying interest rates more than nine percentage points above the base rate and is furious that banks such as Barclays feel able to offer bonuses reminiscent of the pre-crash boom. If the banks do not change their ways, she says, the Government must simply withdraw the insurance guarantees that have kept them alive.

Instead, public money should be used to bail out households and businesses threatened by bankruptcy. “The banks are not using the money productively, yet what we need is for the Government to spend more productively,” she says. “But now there is a consensus that governments should not spend any more in this crisis. That will tip us into a big depression.”

She likens Alistair Darling, the Chancellor of the Exchequer, to a high-wire artist. “He thinks that if he can just keep his eyes closed he will get to the other side. Yet underneath him is this vast debt that has not been cleared off the banks’ balance sheets. Many of the banks are still insolvent and this has not been addressed.”

I was right. The 2009 ‘recovery’ was ephemeral, and was soon to be choked off by Britain’s high levels of private debt. Thereafter Britain was tipped into a prolonged recession, a slump even more severe than the Great Depression of the 1930s when GDP recovered its previous high after just four years.

In 2010 the UK started the year with 0.4% growth. Manufacturing grew by 1.4%. However, there were still signs of fragility in the recovery as exports continued to fall, while the return to 17.5% VAT hit consumer spending. In July, 2010 Professor Victoria Chick and I published “The economic consequences of Mr Osborne” where we argued that

“when sustained, fiscal consolidation increases rather than reduces the public debt ratio and is in general associated with adverse macroeconomic conditions.”

At the end of 2010 the “recovery” stalled in the final quarter after a very cold winter led to a shock 0.5% decline in GDP. The services sector declined by 0.5%, while construction fell 3.3% quarter on quarter.

Things looked grim as Chancellor George Osborne prepared to reveal his £81bn package of spending cuts.

“Recovery” in 2011

The economy returned to growth in the first quarter of 2011, largely as a result of the mild stimulus applied by Labour’s chancellor Darling. However, figures revealed that household spending declined by 0.6% in real terms, its biggest drop since the second quarter of 2009 after consumers were squeezed by the failure of wages to keep pace with inflation.

As a result of both falling incomes, massive cuts in public and private investment and increases in taxation, the UK’s economy declined again in the second quarter of 2011 by 0.1%, although this was only recently revealed in revised figures.

The losses caused by one-off events in the second quarter of 2011 were offset in the third quarter as the services sector, which makes up 75% of Britain’s economy, grew at 0.7% up from a previous estimate of 0.6%. But real disposable income growth slowed to 0.3% in the third quarter, from 1.3% the previous three months.

Plunging business investment led to a fresh decline of 0.3% in output in the final quarter of 2011, while the manufacturing and services sectors also shrank in the period. Although household spending returned to growth, it was still a whole percentage point lower than a year before.

And then in 2012 Britain experienced the first ‘double-dip’ recession since the economic turmoil of 1975. In other words, the economy fell back into recession before it had a chance to recover its previous high of economic output.

The ONS reported that the fall was driven by the biggest decline in construction output for three years, while the manufacturing sector failed to return to growth. However, the figure is subject to revisions, as only 40% of the data used in the final estimate has been collected.

The big question that now faces Britain is this: will this 2013 “recovery” be sustained? Or will it too once again, be choked off by the UK’s high and rising levels of private debt?

We shall see.

 

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One Response

  1. Regarding the construction industry. There has been significant private sector investment into the construction industry in recent times and this has clearly paid off, not to mention the creation of new jobs (particularly for young people). If the government reacts to this and sees the industry as returning to health, through investment, we can keep this growth going. But just seeing how it goes over the coming quarters is not a viable option.

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