UK growth - anything to be done?
- 26 July 2011
- From the section Economy
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.
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.
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.