UK growth - anything to be done?

 

The latest UK GDP number would be disappointing - if expectations had not already been set so low.

And the Office for National Statistics (ONS) has given the government and the rest of us some extra source of comfort, in its "broadbrush" estimate that growth would have been 0.5 percentage points higher, had it not been for one-off factors like the royal wedding, the Japanese tsunami and the sunny April.

With those factors, the UK economy is now reckoned to have grown by just 0.7% in the past 12 months, well into the second year of recovery after one of the deepest recessions of the past 100 years.

Without those one-off events, the economy would perhaps have expanded by 1.2% since the second quarter of 2010.

But that is still far below what we might have hoped for - and significantly below the growth expected this year from most of our main trading partners.

On average, the latest independent forecasts have the UK growing by 1.3% in 2011, significantly below the official Office for Budget Responsibility forecast of 1.7% - and there is not much in the second quarter ONS figures to suggest those predictions need to be revised up.

That compares with a consensus forecast 2.5% growth for the US, 3.4% for Germany and 2% for France (which had a much shallower recession than Britain did).

Those economies have also had "one-off factors" like the Japanese tsunami to contend with (though admittedly, they were deprived of the pleasure - and accompanying distortions - of a royal wedding).

Partly as a result, the US has had its own "soft patch" in the last few months.

But as I discussed on the Today programme, there is no getting round the fact that the UK's recovery seems more easily put off course than another countries. And much slower than previous upturns.

NIESR recovery comparison NIESR recovery comparison

This graph, from the National Institute for Economic and Social Research, shows how long it took the UK to get back to the pre-recession in previous downturns - and how long they expect it to take this time.

This is on their basis of their forecast of 1.4% growth in 2011 and 2% in 2012, which is more or less in line with the consensus.

If those forecasts are right, the cross on the far right hand side of the chart shows the point when we would finally get back to our previous peak level of output.

In other words, this would by some margin be the slowest recovery in nearly 100 years.

So much for the data. The big questions, now, are why is the upturn so anaemic - and whether there is anything that policy-makers could usefully do about it? Neither is easy to answer.

On the causes, the debate comes down to whether this is fundamentally a supply side issue - or a demand side one.

The supply side explanation would be that the financial crisis revealed fundamental flaws in our economy that had been waiting to bite us: above all, an excessive dependence on consumption, by the government and by households.

If that's fundamentally what's going on, then several years of weak consumption and a pretty rubbish recovery might simply be unavoidable, while the various pieces of a new productive economy gradually fall into place, and the unproductive bits get cast aside or re-worked.

By contrast, you might think the problem was a chronic shortage of demand in many advanced economies, including the UK.

This could also be down to the financial crisis, which has led to a situation in which companies, households and governments all want to cut borrowing and increase saving at the same time. (Not a happy coincidence for the global economy).

If that explanation is right, then you could be looking at a Japan-style scenario, needing drastic action.

Of course, the truth is that we are probably suffering from both a demand problem and a supply challenge.

George Osborne: ''Britain is a safe haven''

But if you see demand as problem number one, like Ed Balls, then you can see why you might want to talk about a temporary VAT cut.

The trouble is, if he's wrong - if the spare capacity isn't there - then this policy risks making the situation worse, by pushing up inflation over the medium term, and weakening confidence in the government's commitment to cut public borrowing and re-balance the economy.

That, of course, is where the chancellor comes in. In effect, he says the only sure strategy for the government is to focus on what it knows for sure, which is that government borrowing and spending need to come down, as a share of the economy.

But there are risks to that strategy, as well. If he's wrong - if there is, in fact, a faster growth path available, which would not undermine market confidence, then the government's strategy could be making the supply side problem a self-fulfilling prophesy, by condemning us to unnecessarily slow growth which could have permanent effects on Britain's potential output.

So - damned if they do, damned if they don't? Perhaps.

But you could ask whether there are policies which would let us hedge our bets - which would help the economy, regardless of whether the big problems are related to supply, or demand.

These would be policies that have maximum chance of supporting demand now, while also improving our long-term supply, and reassuring the markets that you are still committed to cutting government spending.

Does a temporary VAT cut fit those requirements? Or abolishing the 50p tax rate? I leave that to you to judge.

However, many economists might be looking, first, at measures that increase investment - either public or private. And they might be hoping to see policies which were more in line with the long-term goal of re-balancing the economy.

Direct efforts to improve the supply of credit to companies - including by making the banking sector more competitive - might well fall into this category.

Another possibility, much discussed within the Treasury, would be a government-sponsored effort to encourage the private sector to lay state-of-the art fibre-optic cable in one or more of Britain's major cities.

When he was in London recently, Google's Eric Schmidt said it would be top of his list for stimulating long-term growth.

But you'd need to act very quickly, do something extremely clever with planning regulations, for that to make a contribution to this recovery, as opposed to the next one, or the one after that.

Smaller, and quicker to implement, would be a national insurance cut for employers hiring younger workers.

That could limit the long-term loss of human capital associated with the current dearth of jobs for young people.

But it has been tried before, with only limited success. And if it worked, it would cost money.

Call it a Plan B, or a growth strategy to underpin Plan A - but I suspect that this is where the UK debate is heading.

If we're "only" talking about a bumpy, anaemic recovery, not a double-dip - and we don't see a game-changer for the global economy in the next few months, like a US default or a meltdown for the euro - these kinds of measures to support the economy look more likely at this stage than another dose of quantitative easing.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 788.

    Indefatigable Pusillanimous Ghost @786

    Whence?

    I met a man who told of death

    Beneath a clear blue sky

    He came alone and hard of breath

    And would not tell me why

    In vain he talked of Light and Warmth

    I made my choice to fly!

  • rate this
    0

    Comment number 787.

    IPG @786
    Ayn Galt?

    Interesting! A twitching possum!

    Pusillanimous!

    Give it up!

    Or write a sequel of hope?

  • rate this
    0

    Comment number 786.

    785.
    Now I know AfA is lost, adrift in an ocean of fake saints + saviours - the light off + crawling in the darkness toward a fire produced by the destroyers of your own humanity! The rabbits forced confused - sipping tea with the mad hatters - never to know truth or reality - lost in whim worship, a follower of death! Exist as a floating corpse,robotic in thought + action reacting to emotions.

  • rate this
    0

    Comment number 785.

    IPG @784Glorious ascension!

    A gleam, flotsam and jetsam, possibly a Portuguese Man o' War, I thought!

    But rising from the waters, behold a gaudy blimp, its captain One-possessed!

    Faster now, ever higher, its lights a new constellation, over-Taking Pisces!

    Really Pusillanimous! Your recapitulation @783, has no "objectivity"!

  • rate this
    0

    Comment number 784.

    I am not in front of the SUN - I am the Sun!

  • rate this
    0

    Comment number 783.

    782. All for All
    Ah, the Revolution is in Ourselves - if each knew the truth of reality - then a rational world would materialise - no more deception, distracts, evasion or fakery - no more mysticism, or the mystic swamp, no more fake saints + saviours - no more death worship, whim worship - no more nonsense, no place for irraitonalism or the dominance of emotionalism in our world! The Possible!

  • rate this
    0

    Comment number 782.

    IPG, what is asked, all that 'rational goodness' asks, is 'the light' be allowed to fall on all

    Children 'educated' by trash-TV, taught clever smoking, need for alcohol, etc

    Some might fail 'achievements' in your estimation - some as Breivik

    But alow a chance - & still take yours!

    You have a noble passion, yet to be sharable rational!

    In front of the sun, IPG, shading the world, is… YOU?

  • rate this
    0

    Comment number 781.

    No 'feeling my way' no confusions, or sense of failure for me or anyone else that 'thinks' rationally, objectively and logically! Only certainty that actions always are good, true and right in an absolute objective moral sense - because it rational! And each will agree - if each is rational, logical, objective and rationally moral! Only irrationalism + emotionalism leads to conflict/disagreement

  • rate this
    0

    Comment number 780.

    778. All for All

    You are correct - I never have a doubt about anything! The noblest act ever achieved is when an individual learns for themselves that 2+2 = 4 always, without deviation, evasion, or self deception! No doubts - because my 'own goodness' is 'universal, absolute' goodness! never 'any action'-just rational, objective and logical action- always good, right + true!

  • rate this
    0

    Comment number 779.

    Must go back to Aristotle and start again -find the truth not mish mash ever so 'clever' pseudo intellectual philosophical giggling gossip! You may 'believe' it possible to be a 'brain in a jar' I know its nonsense. exercises in philosophical masturbation just makes philosophers look needy or seedy, but makes good Monty Python comedy -not so useful to human beings though - unless we need a laugh!

  • rate this
    0

    Comment number 778.

    @774
    IPG, missed point, with ease!
    "Not naturally good" did not refer to "thinking"!

    Thinking straight might be "naturally good"

    "Not naturally good" / evil, referred to you & me & many others, still 'feeling our way' in a world that sadly dictates much confusion & sense of failure

    Perhaps you have never doubted 'your own' goodness, or the 'goodness' of any action?

    I should have guessed!

  • rate this
    0

    Comment number 777.

    775
    Epistemology has an argument for every 'possible' point of view - philosopher laugh at us all! But ONLY one explanation can possibly be correct - it is necessary to identify what reality IS. Knowledge is knowing reality - existence exists, reality is real, Objectivity is possible to each + the subjective mish mash leads you down rabbit holes - the sceptics + cynics must be rejected.

  • rate this
    0

    Comment number 776.

    And listen carefully now AFA - no social organisation of Human Beings can achieve equality on the basis of a demand that I sacrifice my personal 'well being' + give up my own achievements of living in order that some feckless underachiever can feel better about their own personal failure to gain any achievements of living for themselves = One must 'empower' individuals to achieve for themselves

  • rate this
    0

    Comment number 775.

    IPG, you have transcended even reason!

    So far out as to be unreachable?

    "To KNOW is to KNOW" us a shaky basis for epistemology - "mystical" even!

    You are the first and only, in my decades of experience, to fail to recognise a hierarchy of bases for confidence in 'knowledge'.

    Clearly you will not regret others' lack of confidence in yourself.

    Non-constructive comment palls.

  • rate this
    0

    Comment number 774.

    Cannot be serious if you believe 'thinking' is not naturally good - it is the PURPOSE of your life - to be human is to think - but to always think rationally, with logic + to seek objectivity - that is the meaning of every Human Beings existence - without 'thinking' you are an ape, an animal, a robot! MORALITY is absolute - if rational - variations are deviations from the rational = irrationalism

  • rate this
    0

    Comment number 773.

    767,768.
    No instinct to follow, Never be a follower or a leader - Never be blinded by your emotional reflexes - there is no 'possible truth' ONLY truth or falsehood! either/or - cannot be true for you false for me - that is mystic nonsense! True to self is true to all - because all truths are,+ must be absolute - if individual is rational, lives for the moral purpose of seeking truth, good right!

  • rate this
    0

    Comment number 772.

    765. All for All
    But your 'oughts' are confused with 'is' and your prescription for salvation is 'more of the same' irrationalism - One does not cure a few cases of insanity by demanding 'everyone' becomes insane! Even if it makes the insane feel better about their own mental issues!

  • rate this
    0

    Comment number 771.

    764. All for All
    Each can believe whatever they 'feel' like believing but it is self delusional - reality IS reality, Fact IS fact - to KNOW is to KNOW - belief is merely faith - it is not the 'best' basis for anything of consequence! Exist on the basis of belief rather than knowledge is barbaric! Must climb out of the rabbit hole - stop following mystic rabbits - stand in the pure light!

  • rate this
    0

    Comment number 770.

    764. All for All

    I am - I know. 2+2=4 ALWAYS!

  • rate this
    0

    Comment number 769.

    IPG, functional brain imaging - positron emission tomography targeting receptor-types, & functional magnetic resonance imaging based on oxygen surrender by haemoglobin - has unsurprisingly suggested, for some confirmed the likelihood, that variation in brain structure might IN PART explain variation in moral as well as physical perception, & hence variation in behaviour & political assortment...

 

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