Recovery: Was that it?

Yesterday’s GDP figures were rubbish. The first quarter of 2015 saw the slowest growth since the economy spluttered in 2012. True, it may, as Chris Giles says, be revised up but even so, 0.3 percent is well below where it should be.

_82614598_gdpgraph This isn’t how recoveries usually work. We would normally expect a big spurt of growth after the recession which then settles into a steadier pattern afterwards. That’s how recessions have always ended in the past. The odd year of 4 or 5 percent growth to offset the recession losses, then a few solid 3 percenters to follow up.

GDP Growth since 1948

That hasn’t happened this time, though. We’ve got the last bit before we’ve had the first bit.

As the New Policy Institute (NPI) commented:

It’s like watching a programme on TV where you can’t work out whether or not you’ve missed an episode. It feels like we are too far along in the story and we’ve missed the good bits.

The NPI reckon the economy has some serious problems. Its recent report, Beneath the bonnet: how sound is Britain’s economic recovery? notes that earnings and productivity have flatlined and the public deficit has remained stubbornly high. Furthermore, last time we had a post-recession deficit of a similar size, the other parts of the economy were in better shape.

Screen Shot 2015-04-28 at 16.43.49

In 1995, households had built up lots of savings while the corporate sector was borrowing to invest and our trade with the rest of the world was only slightly in deficit. It’s not like that now though:

2014/15 is very different. The household sector needs to save more not less. The balance of payments deficit (5.3%) is well above its long term average (1.8%). The corporate sector deficit (the first since 2002) is a relatively bright spot but (at -1.5%) is pulling the economy a lot less strongly than it was in 1995/96.

At the moment, though, households are spending not saving. As Robert Peston said, the last quarter’s growth was shopping led. If people stopped shopping, there wouldn’t be much recovery at all.

The NPI’s conclusion:

While on the surface the economy may seem to be doing OK, a glance beneath the bonnet of the British economy reveals a vehicle in urgent need of attention. The engine is straining – lots of employment but of questionable quality; negligible productivity growth – and the steering is awry – the public sector deficit is going in the right direction but the other sectors are out of line. Neglect the first problem and the car won’t go much further. Neglect the second and another crash is not if but when.

If you think that’s pessimistic, try John Aziz’s piece in Pieria:

[T]he falling growth rate is another factor — like low inflation, like zero productivity growth, like weak investment levels — illustrating that we have not outgrown the problems, even with interest rates at record lows. With yet more spending cuts to come after the election, recession beckons.

There was some slightly better news last week when the public finances showed some improvement on last year. The trouble is, a lot of this is due to low inflation, low-interest rates and the windfall of delayed taxes being held over to dodge the 50p tax rate. The short-term outlook for the public finances may have improved but the underlying weaknesses in the economy seem to be getting worse. It’s like having a big win at the races on the same day as being demoted at work. An unexpected wedge of cash helps to cover up the fact that your longer-term ability to earn has taken a hit. 

If the OBR forecasts are right, 2014 might be as good as things will get and, from now on, growth will slow down again. This week’s figures might be an early warning of that. As the NPI says, it does feel a bit end-of-the partyish. It’s already 3 in the morning but somehow things never really got going.

So it looks like that might be it. That was your recovery. I hope you were paying attention, otherwise you might have missed it.


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6 Responses to Recovery: Was that it?

  1. sdbast says:

    Reblogged this on sdbast.

  2. Neville G.Fisher. says:

    Yes that is all very well but people will not save unless they see a return on their investment. With such interest rate people seem to buy ‘Solar Panels’, ‘Heat Pumps’, etc., which they believe gives them a return for their money.

    Plus do I not remember that with near ‘zero inflation’ we may be on the verge of entering into ‘deflation’.

    The behaviour of the politicians in the election probably means that people are buying things (like homes abroad), to cheer themselves up and forget about all of the false promises, the Labour party, and ‘mouse woman’.

  3. P Hearn says:

    No worries folks. Ed’s gonna boost GDP, (admittedly with a teeny, tiny bit of borrowing and a Mansion tax or two), aided and abetted by Nicola & Alex, and he’ll spend our way back to recovery. What could go wrong?

    Meanwhile, back on planet earth, the economic birds of 70 years’ of unfunded state spending are coming home to roost. You ain’t seen nothing yet.

  4. Reblogged at

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