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.
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.
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:
Disappointing GDP figures today, but this already looked more like the end of a recovery than the beginning of one http://t.co/mD2U2hmaob
— New Policy Institute (@npi_research) April 28, 2015
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.
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.