This recovery is still weak

Great news, the economy grew by 2.8 percent last year. It’s great news because it’s better than the 2.6 percent previously forecast and better than anything we’ve seen since 2006.

Like all these things, though, what you mean by good depends on where you start from. Compared to previous post-recession recoveries, 2.8 percent is rubbish.

GDP Growth since 1948

Source: ONS, OBR

In the past, we have relied on a few years of 4 percent or more to make up for lost ground. This time, we have a lot more ground to make up but growth rates refuse to touch 3 percent and, according to the OBR’s projections, will not do so for the rest of this decade. In other words, that was it. 2014 was your post recession boom.

The ONS report on Economic Well-Being was released on Tuesday. It contained this chart showing per capita GDP and Net National Disposable Income (NNDI) per head since the recession. NNDI strips out depreciation and dividends paid to foreigners.

Screen Shot 2015-04-01 at 16.02.13

In other words, then, when you look at the aspects of GDP that contribute to the well-being of people in the UK, there hasn’t been much growth at all.

Once again, to take a longer perspective, Ben Chu helpfully put the figures for the past decade or so onto this chart.

CBcY3FxWsAAT3tL This shows how far we fell and how long it is taking us to come back.

How far the government is to blame for this is a question economists and historians will pore over for decades. A majority of the economists surveyed by the Centre for Macroeconomics think the government’s spending cuts caused a drag on GDP growth. So does the OBR. While its estimates are fairly conservative, others blame austerity policies for 85 percent of the shortfall between where we are now and the OBR’s 2010 forecast.

That said, it’s unfair to blame the sluggish economy entirely on Coalition policies. For most advanced economies the recovery has been slower this time than in previous recessions. Even in the US which, apart from Canada, has grown faster than the other G7 economies, the recovery has been slow. American commentators describe as dismal rates of growth that look enviable to us but compared to previous recoveries they are.

Perhaps the more important question, though, is this. If cuts acted as a drag on GDP growth in the last parliament, what will even bigger cuts do in the next one? US growth and world trade seem to be slowing down and the OBR forecasts for the UK economy suggest continuing slow growth here too. Eight years after the crash, the recovery is still weak and there are no signs of it gathering any more speed. Taking even bigger lumps out of public services is likely to make things worse.

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14 Responses to This recovery is still weak

  1. sdbast says:

    Reblogged this on sdbast.

  2. P Hearn says:

    So, this recovery is weak compared to previous recessions, though this recession was also [much] deeper compared to previous recessions.

    Other economies are also recovering slowly, even America.

    Not sure quite what novel or insightful point this post is making?

  3. Patricia Leighton says:

    I think it shows that the key outcome is political, not economic. This is that people have borne the burden of the recovery, such as it is, and in all EU states the gap between the haves and have nots, who see the issue from a disposable income perspective, means political problems pile up. We have been clearly’not in this together’, and the failure of this government in the UK to address the deep seated problems of poor management and weak productivity will compound these political problems.

  4. Dave Timoney says:

    @P Hearn,

    The insightful point is that much of the growth trumpeted by the Tories of late is actually due to the better performance of foreign companies (and foreign-owned assets) based in the UK. The NNDI per head figure is a better indicator of the underlying growth rate of UK companies. This suggests that we’re nowhere near recovery and the current trend (2013/14) doesn’t suggest we’re making up ground.

    Taken together, the low levels of UK productivity and capital investment, and the worsening balance of payments, all suggest that the arrested recovery of 2011/12 may have caused permanent damage to the capacity of the UK economy. As Patricia notes, this was a political choice.

    • P Hearn says:

      Fair enough Dave – it’s a straightforward political point against the Conservative party. I had assumed as much, given that it’s on this excellent blog.

      Presumably France’s anti-austerity policies might show what the alternative would have been had we kept stimulus spending up? Of course, we’ve had no meaningful “austerity” in macro terms, with government spending still £100bn more than income and barely reduced in overall terms. Yes – at department level, it’s been brutal, but that’s due to fear of cutting the NHS, pensions, schools or overseas aid, thus hugely stressing the remainder of the pie.

      In my manufacturing business, we are about to invest a substantial sum in CNC equipment, (waiting for election outcome first though), and all the machine tool suppliers I speak to are busy as bees. None of those suppliers is British. Most report they have been rushed off their feet for the last year, and this wave of investment has to show soon in improved productivity as the slack and over-[wo]manning is taken up and boosted by automation.

      I do agree that many British companies could improve substantially in their management, so perhaps we are best to let overseas organisations run things here and learn by example from them? Nissan in Sunderland and Toyota in Derby are both considered world-class factories, for example. Certainly they beat British Leyland at Longbridge, or Jaguar at Browns Lane (when they weren’t on strike of course).

      Making GDP the arbiter of success is questionable IMHO. We can all spend borrowed money to raise it, feel good and claim success, but that just leads to the unpaid credit card scenario. GDP should represent total spending netted off against aggregate government and private borrowing – that’d be a proper accounting measure perhaps. Opining about increased GDP is meaningless – it’s the bottom line after costs and borrowing come off that counts.

      • Mark says:

        “GDP should represent total spending netted off against aggregate government and private borrowing”
        That would mean that you wouldn’t report things as they were produced, but instead when debt was paid off.
        Uh… to be honest, I think we have a major problem in that people are too focused on the financial rather than the real side of things. Debt and ownership represent the distributional side – who gets what – but surely what is actually being produced, the real goods and services, are more important?
        Saying that we won’t record production until there are no claims to future production (debt) involved in the transaction seems like an additional layer of abstraction on an already over-complicated system. Confusing production with distribution. I’m not even sure it’d really mean anything given the financial system we have.
        It’d be better to more clearly separate in our minds the different elements – 1) How much stuff is getting made 2) what is getting made 3) who gets it. Three separate questions. Simple.

        • P Hearn says:

          Not saying you nett off against total debt, but rather against annual repayment costs of investment and depreciation. In other words, the way everyone else does it.

          It’s not a difficult concept.

          • Mark says:

            I’m sorry… so the most significant metric for the economy is total spending minus total borrowing, and by “borrowing” you don’t mean total borrowing, but the annual cost of repaying borrowing that is related to investment, and depreciation?
            Are you actually making a sensible point here? If so could you possibly explain it to me in a little more detail?

          • P Hearn says:


            Can’t reply to Mark directly as no reply link by his last message, but in short this wasn’t meant to be a difficult or clever point. In simpler terms, if we work on the basis of GDP, we’ve all done “best” the year we purchase a house or car or some other large item as our spending will be highest in that year. The fact we have a mortgage/personal loan for some years hence is ignored.

            If you want to measure spending, then fine, GDP does the trick (obviously – that’s all it is). However, as an arbiter of an economy’s health, it’s a blunt tool, and one might want to take other factors into account before drawing any conclusions.

      • Dave Timoney says:

        Like the rest of the Eurozone, France has been pursuing austerity, not anti-austerity, though it has had trouble meeting the annual deficit target of 3%. It has cut public spending, increased VAT (reversing an earlier reduction) and passed various “market liberalisation” measures. Though the British press likes to characterise the governments of Hollande and Renzi as anti-austerity, and therefore in conflict with Merkel, they are vanilla neoliberals.

        The problem with letting foreign companies run British industry is that it means profits will be lost to the national economy. Though British capitalists have historically been “unpatriotic”, often willing to invest abroad more than at home, they have at least had the choice and can occasionally be persuaded to invest domestically. If British industry is run for the primary benefit of foreign capital, then the aggregate recycling of profits into domestic productive investment will reduce over time. We will eventually become dependent on foreign direct investment – i.e. more like Ireland than Germany or France.

        Despite the regular cricticism it gets, GDP is a meaningful indicator because it represents (however crudely) output and thus the actual productive activity of capital and labour. We fixate on abstract numbers, such as the national debt, when we should be looking at the material reality. The deficit is a distraction from the continuing decline of British industry.

        • Mark says:

          “The problem with letting foreign companies run British industry is that it means profits will be lost to the national economy.”
          Surely it doesn’t matter if it is a foreign company, if they are paid in pounds, they must use those pounds in the British economy. They aren’t accepted elsewhere.
          (Or they can exchange the pounds for some other currency with someone who does wish to use pounds.)
          The only “problem” would be if they used those pounds to buy things produced in Britain and then actually physically exported those goods to another country for the sake of investment there rather than in the UK. But, I don’t imagine that foreign ownership is likely to directly cause this. Does having a French owner of a car factory make it more likely that a British machine tool factory will export to France?

          • Dave Timoney says:

            While a foreign company could choose to hold their UK earnings as Sterling, either for future expenditure in the UK or as a hedge against exchange rate movements, they can also exchange Sterling for their home currency. A lot of them will do this because they have stockholders who want profits repatriated to pay dividends, buy-back shares, or invest in other countries.

            The buyers of that Sterling would include those purchasing UK goods and services, but they would also include UK residents exchanging their earnings on non-UK assets and foreigners buying futher UK assets. The size of these different flows is reflected in the national current account, where we have had a worsening balance of payments since 2011. This is not due to an increasing trade deficit (i.e. imports of goods and services exceeding exports) but a decline in the income earned on foreign assets owned by UK residents relative to the income earned on UK assets by foreigners.

            Persistent current account deficits have to be funded either by borrowing from abroad, selling foreign assets or by foreigners buying more UK assets. This exacerbates the problem. We end up with more debt whose interest payments flow abroad (whether this debt is held by government, business or household sectors is irrelevant to the current account), less foreign income, and a greater share of UK-generated profits being siphoned abroad.

            The result is that the net worth of the UK declines relative to the monetary base, which leads to devaluation. While that could boost exports (though the evidence of 2008/9 is that it doesn’t), it will certainly shrink repatriated profits, which could result in foreign companies taking their capital elsewhere. The chief way to increase margins to offset the devaluation, particularly if imports push up costs and productivity growth is weak, is to squeeze wages. That is precisely what has happened over the last 7 years.

          • Mark says:

            Profits can’t go abroad. Sterling can’t be used except in the sterling economic area.
            We are talking about *demand* for investment. Whether that demand is domestic, or foreign is entirely irrelevant – “foreign companies taking capital elsewhere” are not physically removing factories and relocating them overseas, they are demanding investment elsewhere.
            I suspect that rather than declines in the pound leading to greater demand for investment in export industries, given the UK economy it actually leads to greater demand in people wanting to live here. Hence oligarch housing bubble.

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