Beneath the bonnet: how sound is Britain’s economic recovery?
The UK economy has had a difficult time since the global banking crisis led to what many call the great recession of 2008 and 2009. Calculations vary of exactly how much output we have ‘lost’ since then as a result of deviating from the historical trend. A figure of around 15% gives a feel of how severe the experience has been.
On the face of it the economy looks to be into a good recovery phase. After many quarters of low or negative growth since 2010, 2014’s 2.7%, was the highest rate of growth since 2006 and above the long term average. Employment has grown strongly. The public sector deficit is less than half what it was at its peak in 2010. On the basis of these factors the outgoing Coalition government has naturally made claims that its policies have been working.
Our question is: how well founded is this recovery? After the dotcom bust in the early to mid-2000s, the economy looked to be doing quite well too. In a previous report, A New Golden Rule (2012), we showed how a look under the bonnet at that point would have revealed signs of things amiss. A deeper look at what was happening then might have led to better policy making. We are taking the same approach here, this time while there is still time to respond.
This paper uses headline statistics to make five points.
- Contrary to the denials, the Coalition ended up adopting a plan B for deficit reduction. That plan – in terms of the path followed by the deficit as it came down – was the one advocated by Labour, to reduce the deficit by half during a five year term. The Coalition followed its own plan for about two and half years before switching track.
- Both the total number in work and the employment rate are at record levels but nearly half of the growth since 2009 has been in self-employment – a far bigger share than is normal. At the same time, income from self-employment has fallen steeply.
- Labour productivity grew strongly after the recessions in the 70s, 80s and 90s, whereas it has barely grown at all since 2009. Without productivity growth, real wages cannot grow while the choices governments must make are far harder.
- As with productivity, so with household income: instead of rebounding sharply as it did after each of the last three recessions, real household disposable income is barely up on where it was in 2009.
- The 4.5% deficit now is the same as it was 19 years ago during the recovery from the early 1990s recession. But at that time, the other sector balances, for households, companies and with the rest of the world, were set fair for sustained economic growth. The current situation, with households spending to the hilt and a big balance of payments deficit, looks like the end of a period of growth, not the early stages.
Behind a steadily falling public sector deficit, the UK economy is both weak and unbalanced. Higher exports and higher investment would be a cure. But standard macroeconomic policies, both fiscal and monetary, cannot make them happen. Unconventional monetary policy, in the shape of quantitative easing, came to the rescue in 2009. Other ‘unconventional’ economic policies are now needed. Deficit reduction is desirable; but it is nowhere near enough.
About this report
This report uses headline economic statistics to argue that 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.