The Organization of Entirely Consistent Disappointment

  • 25 May 2011
  • From the section Business
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Cash machines
Image caption The single most important component of final demand, consumer spending, has been stagnant

A year ago, the OECD was predicting that the advanced economies, as a group, would grow by 2.8 per cent in 2011, and the UK would grow by 2.5%.

Since then, the organisation has lowered the UK number on every available opportunity - culminating today in a new forecast for 2011 of 1.4% growth.

The forecast for the OECD member countries as a whole has also been revised down, but by less and less recently; in November it went down from 2.8% to 2.3%.

So, the UK, it is fair to say, has been something of a disappointment to the OECD. But it has passed one test with flying colours.

A year ago, this same institution was also on the long list of bodies - often quoted by George Osborne - calling for steeper and swifter cuts in UK public borrowing.

As today's report notes, approvingly, this "needed fiscal consolidation" has now been implemented by Chancellor Osborne and "strikes the right balance."

But in last year's report, the OECD's economists also had some free advice for the Bank of England: with the recovery under way, they said the Monetary Policy Committee (MPC) should be getting a move on with rate rises.

The report went so far as to suggest that base rates should be back at 3.5% by the end of 2011, with tightening to start "no later than" the last three months of 2010.

At the time, that sounded rather over the top. Now it's downright depressing.

If only we lived in an economy enjoying a "normal" recovery, with interest rates expected to reach the dizzy heights of 3.5% by the end of the year.

Two short conclusions from all this:

  • One is that the OECD is fallible - it gets things wrong at least as much as every other forecaster, possibly more. Remember that, next time someone tells you the "OECD has said" this or "recommended" that.
  • Second, and much, much more important, the people who said 2011 was going to be the most dangerous year for the global recovery were probably right, though - as the revisions suggest - the dangers seem more apparent in the UK than elsewhere.

As the Bank of England's Paul Fisher underlined in a rather dove-ish speech yesterday, the recovery that the OECD and others were looking at last year, like most upturns, was driven in its early stages by investment and - especially - stockbuilding.

But for the recovery to continue, we were always relying on final demand to start picking up as well. The single most important component of final demand, consumer spending, has been stagnant for a year.

Fisher has some nice charts to tell the story - the first showing how consumption has been thrown off course (chart 5), the second showing how unusual this is (chart 6).

Neither the OECD nor the Office for Budget Responsibility are expecting consumers to jump back to the past trend - in fact, it's part of the whole re-balancing scenario that UK consumption comes out of this lower than before.

Even in 2012, the OBR forecast has consumption growing by just 1.3%, following 0.8% growth in 2011.

But the official forecast does have businesses queuing up to invest in this subdued environment, with investment up nearly 7% this year and nearly 9% in 2012. (The forecasts for later years are even higher).

Investment led the recovery the 90s and could do it again.

But today's more detailled breakdown of GDP in the first quarter shows business investment declining.

The real possibility that this investment will not materialise, in an economy in which consumption could be even weaker than expected, is one of several reasons why neither Paul Fisher nor most of his colleagues on the MPC seem likely to vote for a rate rise in the next few months.

George Osborne followed the advice the OECD gave him last year. The MPC will not.