The triple A versus the triple dip

Bus outside Bank of England bearing Broken City film ad Did austerity "break" the recovery?

George Osborne had a surprisingly good week. The UK economy did not.

Today's PMI survey in manufacturing shows a further decline in manufacturing activity in February. March could yet help turn things around, but if next week's survey of the larger services part of the economy is also weak, there is a distinct possibility that national output will shrink again, in the first three months of this year.

In other words, it is quite possible we will see that much talked-about "triple dip".

Just as worrying, perhaps, is the depressing news on exports in this survey, and the revised GDP figures earlier in the week.

As I mentioned on the 10 o'clock news on Wednesday, those new estimates suggest that the economy did see some growth last year, especially if you exclude our shrinking offshore oil sector.

But, far from supporting the recovery, our export sector actually pulled it down in 2012, with net exports subtracting about 0.8 percentage points from the annual rate of growth. Today's manufacturing survey shows new export orders declining in February, for the 14th month in a row.

On this evidence, we are not exporting our way out of depression. At all.

What can the chancellor do about any of this? That is the question we will all be asking, in these last weeks before the Budget. It is certainly a more important issue, for most people than the loss of Britain's AAA credit rating. (Indeed, for exporters that downgrade might even be helpful, at the margin, to the extent that it adds further downward pressure to the exchange rate.)

The chancellor came out fighting, on Monday, in the wake of that downgrade by Moody's. Where many around him - even in his own party - saw the loss of the triple A as a humiliating failure, Mr Osborne decided to see it as further confirmation that he had been right all along.

You might think that's stretching things a little. But the way Mr Osborne sees it, the coalition's strategy in 2010 was based on the idea that the hole in Britain's public finances would not fix itself, and could fatally damage the country's standing in world markets, if left to fester.

On this line, the Moody's decision shows just how right he was. The implication is that we would have lost the top credit rating even sooner, had Labour been in charge, with a somewhat looser approach to borrowing.

This argument is correct, on its own terms. Moody's certainly did not downgrade the UK because it felt that the deficit reduction programme had proceeded too quickly. It's the rise in the stock of debt that has them worried, not the pace of austerity.

However, critics of the government's approach, such as Martin Wolf of the FT, would say there's a hidden assumption in this whole line of argument. That is that there was no alternative approach that would have delivered faster growth - and maybe lower borrowing as well.

On this view, the argument over whether or not "austerity" killed the recovery misses the point.

The Bank of England and the Office for Budget Responsibility think the slow pace of growth since 2010 owes more to the eurozone and imported inflation than it does to Mr Osborne's tax rises and cuts in public investment.

Maybe they are right. But Mr Osborne's critics would say he might still have done more to offset these negative factors, and so produce a stronger a recovery.

If you believe the IMF's new, higher estimates for the so-called "fiscal multiplier" (and some do not), a stimulus programme, or a more growth-friendly combination of spending cuts and tax rises - with fewer cuts in public investment - might well have delivered faster growth after 2010, without making the fiscal situation any worse than it already was. Borrowing, on this scenario, might even have ended up being lower, thanks to faster growth in tax revenues.

This is, apparently, what Ed Balls believes. But he did not do a very good job of making the case in Parliament this week - which may partly explain why Mr Osborne came out of this week surprisingly well.

For economists, as opposed to politicians, there is not a lot of point debating what might have happened after 2010, and whether a different approach to the deficit might have brought more growth. We can't rewind the tape and do the last two years again. But there is all the reason in the world to think about what the authorities can do to support growth right now.

Clearly, the Bank of England is thinking about that quite hard. Three members of the Monetary Policy Committee voted for more quantitative easing last month - including the Governor himself. It might not take much more bad news for a majority to vote that way next week. And we know from testimony this week from Paul Tucker that other more radical steps are also being considered - at least by some.

Many in the city and in all of the main parties would like Mr Osborne to be thinking the unthinkable as well. He has shrugged off the loss of Britain's top credit rating, but the questions about what, if anything, he can do to kick-start growth are going to be harder to shake.

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

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  • rate this

    Comment number 92.

    No 81. Dead right. We have been in long term decline interrupted by the odd boom. We blew our manufacturing base & for the similar reasons have blown the banking/finance boom (bad to incompetent management). There are clear and praiseworthy exceptions but for so long we failed to invest for the future-taking the easy route instead of short term profits (agree with all your other points).

  • rate this

    Comment number 91.

    80 MKMAT

    I have given up watching/listening to the BBC News. Even when there is good news the BBC will find a negative. I honestly believe that the BBC, like Balls, wants GB to go belly up so that Labour can get back in.

    Is that what a "Public Service" broadcaster is for?

  • rate this

    Comment number 90.

    Moody's downgrade does not support Osborne's strategy for managing the British economy. The Chancellor's claim that it affirms his policies infers that he actually welcomes Moody's decision - a clear absurdity. He has cut too deep, too quickly.

  • Comment number 89.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 88.

    Why would other countries want to buy manufactured goods from the UK?

    The countries that are the potential markets for such items can make them for themselves. We, in the UK, thought, in the main that the world of the 1960's would go on forever and stopped the investment required to build the products that they cannot will take 20 years of the right investment to rectify the situation.

  • rate this

    Comment number 87.

  • rate this

    Comment number 86.

    @ drogstar33. 81. Agreed. I find it hard to believe someone who has studied a subject built on using evidence from the past to model and predict the future can make such a comment.

    "pffft lets not worry about what 'might' have happened, better to just roll the dice and see what happens tomorrow... What? Learn from mistakes? try something different?... You must be mad"

  • rate this

    Comment number 85.

    Economists are gamblers and not part of the solution. When household incomes across Europe are under pressure from higher taxation, higher utility costs, higher food costs, higher fuel costs and wages are increasing below inflation its no wonder we have had or about to have a triple dip recession it doesnt take a genius to work out and quatative easing only eased the bankers pain.

  • rate this

    Comment number 84.

    Bankers, economist, politicians, read the first few chapters of Genesis, all of this mess is explained in one verse 'I shall put enmity, antagonism, between your way and mine'. Man only has growth so far at the expense of 'everything else'. WE also happen to be part of 'everything else'. Printing money, lowering interest rates to fuel consumption, financial's just delusional.

  • rate this

    Comment number 83.

    While the government and its agencies are borrowing money to spend abroad there can not be a recovery in the economy. Their behaviour is exactly opposite Keynes and represents taking VAST sums from the UK. Worse is it is Keynsian in other economies - France, Germany, Russia, USA. How can our manufacturing compete abroad when our own government buys abroad? Hit both financially and by marketing.

  • rate this

    Comment number 82.

    "For economists, as opposed to politicians, there is not a lot of point debating what might have happened after 2010"

    This passage left me flabbergasted. How obtuse a viewpoint! Dismissing the affects of a policy that will be studied for many decades when this depression is over. Keynes would have made mincemeat of Osborne if he was still alive!

  • rate this

    Comment number 81.

    Economies suffer long term decline in the same way as people, companies and societies do. History is littered with examples. The UK will not recover in my lifetime encumbered as it is with debt, excessive government expenditure, an antiquated manufacturing sector , poor HR quality - management included - and a cop out belief in government being there to solve all problems & make it easy.

  • rate this

    Comment number 80.

    "why we are not exporting our way out of depression"

    Its a depression now is it Stephanie. Obviously the revision of 2012 upwards and employment figures passed you by.

    When are you going to find something good to say?

  • rate this

    Comment number 79.


    'To be fair Labour had already committed to a fair amount (but not all)of the Tory cuts eg. Police, local govt etc. The question is the pace of the cuts.'

    Except all Balls ululates is 'too fast, too deep'. He doesn't give a timetable for his own cuts. He doesn't say what he'd cut and when. Just 'not that' and 'not now'.

    It's pure opportunism.

    He's useless. Just as he was before.

  • rate this

    Comment number 78.

    The economy is static because the British people are tied down by excessive debt. Because of the government bailout in 2008 the banking sector owes a huge financial and moral debt to UK taxpayers. Therefore, banks should reciprocate the bailout from taxpayers by cancelling personal debt. That would provide a huge boost to the economy.

  • rate this

    Comment number 77.

    @ Dandalf. 69. You are half correct. There is nothing wrong with growth built on debt, where the debt is related to physical Captial Assets.The national debt is not a problem.
    The housing market is an issue, only due to over valuation, not macro level economic growth.
    The problem is debt built on Finance Capital. Speculation on Paper assets like securities. It cannot underpin long term growth.

  • rate this

    Comment number 76.

    We are never going to export our way out of this mire. Interest rates need to be raised, thus reducing imported inflation, making the vast army of savers feel better off and more inclined to spend, and to allow the property market to adjust to an affordable level of pricing. Then the recovery will start.

  • rate this

    Comment number 75.

    Glad one of you is still around.

    Surveys almost always pessimistic. Small manufacturers I'm talking to are mostly positive and busy.

    Generally agreed that economists are no better than astrologers and always too bullish or too bearish if you can find actually two who agree.

    And like the BBC will argue that they are "never wrong."

  • rate this

    Comment number 74.

    @64. Stuart Wilson

    To be fair Labour had already committed to a fair amount (but not all)of the Tory cuts eg. Police, local govt etc. The question is the pace of the cuts. Which is what Balls has said all along.

    In other words you get through the storm first without sinking and fix the holes in the boat afterwards. 1930s/1870s are lessons in history we seem to have forgotten.....

  • rate this

    Comment number 73.

    SF: 'And we know from testimony this week from Paul Tucker that other more radical steps are also being considered - at least by some.'
    ~ ~ ~
    I wonder if that might do more to ruin our UK banks than any cap on bonuses; capital flight might assume flood proportions.


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