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We avoided a triple-dip recession but this is not good news
Today’s GDP figures were certainly better than expected, with growth of +0.3% topping the estimates of most economists. But noting that something was better than expected does not mean it qualifies as ‘good news’.
The fact that avoiding an unprecedented ‘triple dip’ is celebrated as a sign of success suggests that expectations really are on the floor. This is like coming last in a race and announcing ‘well, at least I didn’t fall over and break my leg’.
Growth of +0.3% takes the economy back to where it was 6 months ago, before the fall in Q4 2012. We have had no growth in the past 6 months, only 0.4% growth in the past 18 months and just 1.8% in the 11 quarters since George Osborne’s first Budget.
Since the Government took office, the manufacturing sector has contracted by 0.3%, construction output is down a huge 9.7% and the service sector has grown by 3.6%. There are no signs of the much hoped for ‘rebalancing’.
As Will Straw notes at Left Foot Forward this is an historically weak recovery.
The recovery is also much, much weaker than the OBR originally expected. The original estimate for 2013 growth was 2.9%. Even after today’s figures we’ll be extremely lucky to get even half of that.
And for all the talk of a ‘global race’ – our growth compares very poorly to other large economies.
Whether measured by historical experience, expectations or international comparisons the UK’s recent economy performance has been abysmal.
Why should Labour think about signing up to Osborne’s plans when they don’t work?
Last week political news focused on a report in the Independent, claiming that Labour will pledge to go into the next election with higher spending plans than the Conservatives.
It gave a preview of forthcoming research from the Fabians:
Arguing the cuts may be unnecessary, the study says that, if the economy is growing by about 2 per cent annually, public spending could rise by 1 per cent a year and Labour could achieve Mr Osborne’s target of seeing debt falling by 2016-17 two years later or sooner than 2018-19 if taxes were increased.
Leaving aside the likely political brouhaha over what this analysis means for the politics of 2015, it is an important contribution to the economics of 2015.
The political debate on whether or not parties should sign up to the Coalition spending plans beyond 2015 is currently crowding out a much more important fact – the UK no longer has a fiscal framework that is fit for purpose.
In effect many are now arguing that policymakers should buy themselves ‘fiscal credibility’ by signing up to a fiscal framework which is failing to reduce the deficit. This seems to me an odd state of affairs.
The Government originally said it would have reduced borrowing to £37bn by 2014/15; the latest estimate is for annual borrowing of £108bn in that year. Cumulatively the Government is set to borrow around £250bn more than it intended.
The current framework is not working, even on its own terms.
Partially this is because many seem to assume that reducing the deficit is simply a result of taking ‘tough choices’ and making spending cuts. But when the economy is weak then the multiplier on government spending is higher and making cuts now simply reduces growth, pushes up unemployment and makes ‘dealing with our debts’ harder, not easier.
Austerity keeps being extended and yet some people continue to argue that setting unrealistic targets and then missing them is the best way to ensure that you are seen as credible.
But the problems with the current framework don’t stop here. I would go further and argue that the structural deficit itself is the wrong target. The structural deficit is not something that can be measured, it is only something that can be estimated and those estimates are highly uncertain.
Those arguing that policymakers should sign up to the current fiscal plans are in effect arguing that policymakers should sign up to a fiscal framework that has failed to reduce the deficit anywhere as much as promised, that binds in tight austerity, that is targeting the wrong measure and that is subject to heavy revision.
The real question that should be asked of policymakers is not, ‘do you sign up to the Government’s current spending plans?’ But instead, ‘what is your proposed framework?’
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A longer version of this post is here.
This is the chart that will determines how the UK economy does
I’ve argued before that if I was forced to choose just one graph to understand the UK economy over the last two and half decades, the one I’d go for is the household savings ratio.
I’ve marked the three stages of the UK economy since 1992. The ‘great moderation’ of unbroken growth from 1992 to 2008 – characterised by a falling savings ratio, the sharp recession of 2008/09 – with a rapidly rising savings ratio and the virtual stagnation of 2010-2012 -complete with flat-ish savings ratio.
In the absence of either strong growth in household incomes (which looks unlikely at the moment) or extremely rapid rebalancing towards investment and net trade (also looking unlikely at the moment) then this chart will almost certainly continue to be one of the most important indicators for the UK economy.
If the household savings ratio remains broadly flat then so will the economy, if if suddenly rises again then renewed recession is likely and if it starts to drift downwards then household spending will rise quicker than household incomes providing a boost to growth.
I don’t think I’m the only one who has noticed this. It is hard to read current Treasury policy on the housing market as anything other than an attempt to drive down down the household savings ratio by encouraging more mortgage borrowing. Rebalancing, as I noted after the budget, has been all but abandoned.
Last week’s forecasts from the Item Club confirmed this. The International Business Times noted that rebalancing is ‘on hold’ whilst the “government’s influence on the housing market could spike consumer spending and engender a faster recovery than many UK businesses are currently anticipating”.
The question then becomes – are policies that drive down the household savings ratio desirable? And here I think the answer is far from clear.
Of course faster consumer spending would provide a boost to GDP in the short to medium term but in the longer term is rising household debt not one of the key factors behind the mess we are now in?
In the long run a recovery will only be sustainable if it is build on the solid foundations of rising household incomes. Sadly that doesn’t look to be happening anytime soon.
George Osborne’s new growth model is the one he argued against
Last week I argued that the new OBR forecasts signalled an apparent abandoning of rebalancing by the Chancellor in favour of a strategy based on house price inflation and consumer spending:
in the June 2010 Budget, the Chancellor expected 57% of all growth to come from his preferred (and ‘sustainable’) sources of business investment and net trade. By this time last year, that contribution had fallen to around 52%, lower but still more than half of all growth.
Yesterday’s forecasts have business investment and net trade contributing only 31% of all growth to 2017…
Three years ago George Osborne argued that “that we cannot go back to the last decade’s debt-fuelled model of growth”. As I listened to his housing market announcements yesterday, I thought “it sounds like he is going to try”.
Chris Dillow echoed this point over at Investor’s Chronicle and, in today’s Guardian, Aditya Chakraborrty makes the point even more forcibly:
The estate agency Knight Frank estimates that it will take until at least 2019 before property prices are back to the levels of 2007. Add to that the Office for Budget Responsibility’s forecast that real wages in Britain in 2015 will be 9% lower than they were in 2010. So the housing market looks less of a sure thing than at any time since 1994, and Britons’ personal finances are a wreck. Osborne may think he’s found an update of right-to-buy, but it looks more like right-to-be-repossessed.
Still, back to that coalition catechism. Government borrowing to build council housing: forbidden. Individual borrowing to buy an overpriced two-bed flat: encouraged. The way to make the economy stronger is to make it more fragile. And we’re all in it together, except really, when it comes to managing your way through this depression, you’re on your own.
Perhaps the finest analysis came from satirical news-site the Daily Mash:
[Osborne] told MPs: “The key difference this time is that I am making it much easier for people with no money to get a mortgage.
“So then, right, they will have a house and the value of that house will just keep going up and up and so every few years they will borrow a bit more money against the value of their house and then spend it in the shops.
“The value of the houses will always go up because most of them will be those lovely new red brick ones that will be built next to dual carriageways on the outskirts of provincial towns.”
As Conservative MPs cheered, he added: “I know. And it’s actually a bit weird that no-one has thought of it until now.”
On a more serious note, NIESR’s Jonathan Portes & Angus Armstrong wrote last week that:
The economic rationale for designing a mortgage market intervention in this way is almost impossible to understand. There are well-known market failures in both the retail and wholesale markets for mortgages, so there’s plenty of scope for radical reform. But, instead of explaining what problem it is trying to solve and how, the Treasury has created yet another subsidy for banks. Worse still, the structure of the subsidy will weaken competition even further by propping up incumbent banks and perpetuating an unreconstructed housing finance market with fundamental weaknesses.
What about housebuyers? To the extent that they see any benefits, it will push up demand and hence prices, resulting in further distortions in an already distorted market. This will redistribute wealth from the poor to the rich and from those who don’t own houses to those who do. It will neither build any new houses nor make existing ones more “affordable” in any meaningful sense.
Their criticisms add to a long chorus of economists who generally argue that the scheme is at best ‘good politics but bad economics’.
But perhaps the best attack on the Government’s growth strategy, it’s lack of rebalancing and the role of house prices was not made last week. In was made in November 2003 by one Dr Vince Cable:
On the housing market, is not the brutal truth that with investment, exports and manufacturing output stagnating or falling, the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level? If the Bank of England is correct in its expectations of a market correction and rising interest rates, what action will the Chancellor take on the problem of consumer debt, which is rapidly rising, with 8 million annual visits from the bailiff?
10 years on, there is a lot of truth in that statement.
In February 2010 George Osbonre argued we need a ‘new economic model’.
Now it seems he is happy to return to the old one.
The chart that shows why our economy needs fundamental reform
New figures from the ONS yesterday demonstrate the extent of the squeeze on middle income households.
The below chart really is quite telling:
This picture is a familiar one – a trend noted many times before by the TUC and the Resolution Foundation amongst others.
The ONS today note that:
Since the start of the economic downturn, original income for this middle fifth has fallen by 8.8%, once inflation is taken into account, driven largely by a reduction in income from earnings. However, an increase in the amount of income received through cash benefits and a fall in the proportion of income paid in taxes has meant that disposable income for this group has fallen by only 3.8% in real terms.
Five things are worth noting from this release:
This problem pre-dates the 2008 crash. As is very clear from the chart above, median household incomes begin to stagnate in the mid 2000s.
Things have got worse since. The data release today only runs until fiscal year 2010/11. The bulk of the cuts in tax credits and other social security benefits enacted by the Coalition are not included in this data. Nor are the real wage falls of 2011/12 or 2012/13.
The coming Budget won’t do much for living standards. It seems likely that the coming Budget will be billed as a ‘living standards budget’ with the centre-piece being a further rise in the personal allowance. However as TUC research published today demonstrates families on all income levels are losing more from the rise in VAT than they gain from the increase in the personal allowance. A real budget focussed on living standard as would include a cut in VAT.
Predistribution matters. In the period 2007/08 to 2010/11 the biggest factor driving down household living standards was the fall in real wages. Rising living standards requires changes in the tax and benefit system but also stronger wage growth.
This is bad for the wider economy. For reasons I’ve outlined before, if we want a stronger, more sustainable recovery it has to be underpinned by rising household incomes.
The OBR has picked a major fight with David Cameron
OBR head Robert Chote has written to David Cameron disputing a claim he made in yesterday’s major speech on the economy.
As Chote writes, the PM claimed yesterday that:
As the independent Office for Budget Responsibility has made clear…
…growth has been depressed by the financial crisis…
…the problems in the Eurozone…
…and a 60 per cent rise in oil prices between August 2010 and April 2011.
They are absolutely clear that the deficit reduction plan is not responsible.
In fact, quite the opposite.
But Chote points out that this is simply not the case.
For the avoidance of doubt, I think it is important to point out that every forecast published by the OBR since the June 2010 Budget has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term.
Specifically Chote writes that austerity measures in 2011/12, by the OBR’s estimate, reduced growth by 1.4%. None of which is to claim that other factors (rising commodity prices/the Eurozone/etc) did not impact on growth.
This is a welcome intervention from Robert Chote. If we are going to have a serious debate about the economy we at least need to get the facts straight. As Simon Wren-Lewis wrote yesterday:
the OBR has never said that austerity has had no impact on growth. What they have talked about is why growth has been lower than they expected back in 2010. As they had austerity built in to their forecasts of 2010, then they have naturally looked elsewhere for events they were not expecting. [b] So this statement deliberately misrepresents what the OBR has been saying, to imply that the OBR believes in expansionary austerity. But the Prime Minister knows that the OBR will let this misrepresentation of its views pass – which is a shame. I guess you can robustly misrepresent.
The OBR have not let this ‘misrepresentation of their views’ pass.
I think the key line from Cameron that has caused him problems is actually, ‘They are absolutely clear that the deficit reduction plan is not responsible. In fact, quite the opposite”. What exactly did he mean by the opposite being true? I read this a claim that fiscal contraction actually increased growth – something for which there is obviously no evidence at all.
The real story today is that the PM made a speech claiming that austerity was not a cause of weak growth and that the OBR agreed with him. The OBR have very rightly pointed out that this is not true.
Almost unbelievably, Downing Street have responded by saying:
The OBR has today again highlighted external inflation shocks, the eurozone and financial sector difficulties as the reasons why their forecasts have come in lower than expected. That is precisely the point the prime minister was underlining.
The OBR write to the Prime Minister rebuking him for misquoting them and he responds that this underlines the very point he was making. >That is almost as bad as losing an AAA rating and then to retain the AAA rating was correct along.
The OBR letter
Letter From Robert Chote to Prime Minister by
Vince Cable can’t break out of George Osborne’s Trap on the economy
Earlier this week I blogged on the growing calls for the Chancellor to launch a capital spending stimulus, funded by additional borrowing, at the Budget that is now less than two weeks away.
As I noted in that post, those calling for such a stimulus include NIESR, Oxford Economics and Citi group who all basically agree that a £10bn capital programme in 2013/14 and 2014/15 would add around 0.5% to growth for two years and be largely self-financing in the medium term.
Yesterday, in an essay in the New Statesman, Business Secretary Vince Cable came as close to joining the chorus as he could within the limits of collective responsibility.
Nevertheless, one obvious question is why capital investment cannot now be greatly expanded. Pessimists say that the central government is incapable of mobilising capital investment quickly. But that is absurd: only five years ago the government was managing to build infrastructure, schools and hospitals at a level £20bn higher than last year…
The more controversial question is whether the government should not switch but should borrow more, at current very low interest rates, in order to finance more capital spending: building of schools and colleges; small road and rail projects; more prudential borrowing by councils for housebuilding…
Such a strategy does not undermine the central objective of reducing the structural deficit, and may assist it by reviving growth. It may complicate the secondary objective of reducing government debt relative to GDP because it entails more state borrowing; but in a weak economy, more public investment increases the numerator and the denominator.
On Tuesday I wrote that the primary argument against a debt-funded capital soending programme now was political.
As Chancellor of the Exchequer he can surely see what the third party experts are saying – a £10bn increase in capital spending funded by borrowing would boost the economy and be largely self-financing. But as election co-ordinator he wants to keep his ‘dividing line’, to argue that he is sticking to his plans and that opposition are spend thrifts who would fritter away his ‘hard-won gains’.
After three years of arguing that deficit reduction is his central aim he has built himself a rhetorical prison in which any increase in borrowing – no matter how low interest rates are or how beneficial the impact on the economy – is wrong. The Chancellor likes to lay political traps for the opposition but this time he seems to have trapped himself.
Yesterday evening, for the second time in a month, I allowed myself to become more optimistic – maybe, just maybe the government were starting to see the light and would be prepared to launch a modest stimulus? This morning my hopes have (again) been dashed. Cameron is arguing that there can be no change in fiscal policy, whilst Nick Clegg has pointedly failed to back the Business Secretary.
We can now simply expect more of the same at the Budget.
Having ruled out a change in fiscal policy, the Chancellor is once again turning to monetary stimulus to ease the crisis. The FT today reports that plans are afoot to change the Bank of England’s remit. But as I’ve written before, whilst there is a case for looking again at the Bank’s mandate we should bear in mind the limits of monetary policy. In the final analysis I struggle to see how short term growth can be boosted without a change in fiscal policy.
In his essay Vince Cable implicitly argued that fiscal policy is too tight, monetary policy too cautious, the Government supply side agenda is misguided and banking is too unreformed. In seems that the Chancellor may be prepared to have a more adventurous monetary policy but refuses to budge on anythiong else. Trapped by his own previous rhetoric the Chancellor is unprepared to change course in a meaningful manner.
Has everyone missed the wider implications of Ed Miliband’s speech last week?
I was in Washington last week for a series of meetings at the IMF and World Bank as part of an ITUC delegation, so I missed Ed Miliband’s big speech on the economy and initially only saw the headlines. Naturally enough the headlines focussed on the major tax policy announcements but when I actually got a chance to read the whole speech, I was struck by how these policies where in some ways the least interesting things he said.
The bigger news for me were the wider implications of the speech – a theme Stewart Lansley picked up yesterday at Shifting Grounds.
What was especially striking to me last week in Washington was how the themes of Miliband’s speech echoed not only those of Barack Obama’s State of the Union but also the tone of much of the recent discussion of inequality coming out of the IMF.
Miliband argued that:
Today, we are increasingly two nations: with high skill, high paying jobs for those at the very top but low-skill, low paid, long hours jobs for too many people.
That’s because over the last three decades, we have seen fewer and fewer middle-income jobs in Britain.
That’s fewer jobs in skilled trades and more jobs paying less, with greater insecurity.
We must turn this round.
So a One Nation economy needs to support businesses that create sustainable, middle-income jobs.
That means a modern industrial policy that supports the sectors that will create those jobs of the future like the green industries that are so important for our country.
And an end to the short-termism which prevents many businesses investing.
Whilst Obama said:
But we gather here knowing that there are millions of Americans whose hard work and dedication have not yet been rewarded. Our economy is adding jobs – but too many people still can’t find full-time employment. Corporate profits have rocketed to all-time highs – but for more than a decade, wages and incomes have barely budged.
It is our generation’s task, then, to reignite the true engine of America’s economic growth – a rising, thriving middle class.
IMF Managing Director Christine Lagarde, at Davos this year, noted something similar.
Miliband, Obama and Lagarde are all, on one level, arguing the same case – what is needed is not just growth but jobs rich growth that actually sees rising incomes for those in the middle and below. This is not just socially desirable but crucial to long term economic stability and sustainability.
This point was reinforced by an excellent article in the Washington Post last week on how middle-incomes across the United States have stagnated.
The picture in the UK, as anyone familiar with TUC or Resolution Foundation research is well aware, is similar. Median weal wages in the UK are set to be at 1999 levels in 2016 – the current squeeze on real incomes follows a long period when real wages did not keep up with economic growth.
The case the Miliband, Obama and Lagarde are essentially arguing is that we need growth that doesn’t look like the growth we had before the recession where too much of the rewards went to those at the very top.
But this isn’t the same as outlining how you intend to achieve it.
The need to design a more inclusive economy means moving beyond traditional macroeconomic policy making, something recognise by thinkers such as Nick Pearce and Gavin Kelly. They set out an economic programme back in September that was notable in that it moved the debate beyond discussions of fiscal and monetary policy.
As I wrote at the time:
One striking feature of their economic reform agenda is how little of it is to do with the traditional levers of fiscal and monetary policy. I think this is exactly correct, the debate about economic policy has to be about far more than taxation levels and spending programmes…
…
Pearce & Kelly’s call for ‘economic radicalism’ seems to reject this approach, it takes the debate inside the ‘blackbox’ of the firm to look at corporate governance, it talks about the structure of the banking and it looks at the scope for raising wages.
What is really required is not just changes to our taxation system or spending priorities but a fundamental redesign of our national business model.
Recent work from the TUC, Lord Heseltine, the Resolution Foundation and the Bank of England’s Andy Haldane all point in the same direction.
Seen in a traditional macroeconomic frame this is essentially about supply side policy – as both the TUC’s Budget Submission and our most recent Economic Report argue the UK requires not just an immediate boost to demand but also fundamental changes to banking, industrial policy, corporate governance, skills policy. The aim of growth has to be to support rising living standards for those in the middle and below and achieving that requires more than just a fiscal stimulus or some changes in tax policy.
So whilst there is much to welcome in Ed Miliband’s tax announcements, I suspect in the longer term it was his remarks on banking reform, corporate governance changes and skills policy that will more significance.
Fundamentally this is a debate about refoming our model of capitalism.
It’s official: UK expected to do worse than Japan during its ‘lost decade’
The reaction in the press to this week’s Autumn Statement has mainly – and for very understandable reasons – focussed on the Chancellor’s policy announcements, in particular the real terms cut in working age benefits. What have got a lot less attention are the growth forecasts – which are simply awful.
Compared to the last Autumn Statement, growth has been heavily revised down.
As the chart below demonstrates – this time last year the OBR expected growth over 2012 to 2016 to be 12%, whereas it now expects just 8.3% – almost a third lower.
But what is striking is that the OBR has just lopped a third off forecasts that where already bleak.
After the last Autumn Statement here were the reactions:
FT’s Chris Giles:
It is about as bad as it could get. When George Osborne, the chancellor, was presented with the draft forecasts a month ago, he must have felt a cold sweat.The Telegraph:
Annual growth forecasts were revised down sharply out to 2014. Growth this year is now expected to be just 0.9pc, compared with the OBR’s March Budget forecast of 1.7pc growth.The Guardian:
The changes to the growth figures in the short-term are eye-wateringly bleak, with the OBR now predicting that Britain will expand by just 0.7% in 2012 (down from 2.5% in the March forecasts).
Look at the longer-term picture. One year ago the OBR gave forecasts that were variously described as “about as bad as it could get”, “revised won sharply” and “bleak”. It has just taken those forecasts and revised them down by a further third.
During its own ‘lost decade’ the Japanese economy grew by 11.9%, a disastrous result over 10 years. The central forecast of the OBR is now that UK growth, over the decade of 2008 to 2017, will have been 8.7%.
To reuse an old Paul Krugman quote:
The slowness with which Japan’s economy deteriorated was in itself a source of much confusion. Because the depression crept up on the country, there was never a moment at which the public clamoured for the government to do something dramatic. Because Japan’s economic engine gradually lost power rather than coming to a screeching halt, the government itself consistently defined success down, regarding the economy’s continuing growth as a vindication of its policies even though that growth was well short of what could and should have been achieved. And at the same time, both Japanese and foreign analysts tended to assume that because the economy grew so slowly for so long, it couldn’t grow any faster.
So Japan’s economic policies were marked by an odd combination of smugness and fatalism – and by a noticeable unwillingness to think hard about how things could have gone so wrong. (My emphasis)
We’re half way through our own lost decade and the government exhibiting the same behaviour that marked Japan’s – consistently defining down success and seeing any growth as a vindication of its policy even though growth is well short of what it could and should have achieved.
Why does the Telegraph think pitiful growth means ‘Good News Britain’?
“Good News Britain: CBI lifts UK growth forecasts”, said yesterday morning’s Telegraph as the CBI nudged up their growth forecasts for 2012 and 2013 and made their first estimate at 2014 growth.
So how much ‘good news’ do the new forecasts actually contain?
Not a huge amount that I can see.
On growth, the CBI now expect 0.0% in 2012, 1.4% in 2013 and 2.0% in 2014. That compares to the June 2010 OBR forecasts (on which Government policy were based) of 2.8%, 2.9% and 2.7%. Growth that weak would mean it would be late 2014 before we regained early 2008 levels of GDP. The Telegraph today says to the new CBI numbers imply Britain will not face a ‘lost decade’, whihc may be true but i’m not sure a lost 6 years is cause for celebration.
As the CBI’s John Cridland commented, “While we expect underlying momentum to pick up modestly next year and to be slightly stronger in 2014, the pace will remain relatively lacklustre”.
On living standards, the news is bleaker. The CBI’s new forecasts for inflation and earniongs growth implies more painful falls in real wages lie ahead.
Whilst the OBR currently expect real wage growth to turn positive in mid 2013, the CBI numbers imply real wages will continue falling until mid 2014 – another year of squeezed living standards.
On the deficit, the CBI expect government borrowing in 2014/15 to be £102.2bn. That is around one thrid higher than the OBR’s current estimate of £75bn for 2014/15.
To summarise – weak growth, a bigger squeeze on living standards and higher borrowing. Welcome to ‘good news Britain’.
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