When the British Chambers of Commerce downgraded its forecast for growth in the British economy at the end of last week it left little doubt as to what was to blame. Britain would expand by a mere 0.1% this year – as close to zero as makes no difference – largely as a result of the storms blowing across the eurozone.
It is a tune we are getting very used to. Economists, pundits and – most of all – politicians, keep blaming the troubles in the single currency for the fact that Britain has at best flat-lined this year, and may well end up in another recession.
Gordon Brown used to blame the bankers on Wall Street for the sudden re-emergence of ‘boom’ n’ bust’ during his premiership. Chancellor George Osborne and Prime Minister David Cameron have taken to blaming the crisis in the eurozone. If it wasn’t for all those crazy foreigners and their haywire currency, we’d be doing OK, reads the script. There’s only one problem with this story. Although it might sound plausible, it is not actually true.
True, the turmoil across the Continent is having some impact here in Britain. Countries such as Greece and Portugal are in deep recession and Spain is going the same way. The banks are growing even more reluctant to lend as they look at potential losses on their bond portfolios. Stockmarkets are wobbling and confidence is taking an inevitable hit. Nothing you see on the news is likely to make anyone feel like investing in a new business. But if the eurozone crisis is having such a terrible impact on the economy, how come some other countries are doing a lot better than us?
Take Germany, for example. It’s hardly insulated from the euro crisis: it’s right at the centre of it. But Germany grew by 0.5% in the latest quarter and is forecast to grow by around 1% in 2012. Not great, but better than Britain. Or take Sweden or Norway, two developed economies right on the edge of the eurozone, but outside the single currency. Both of them might be expected to be as badly hit as everyone says we are.
Yet the figures don’t bear that out. In Sweden the economy grew by 0.8% in the latest quarter and should expand by more than 1% for the year as whole. Norway is expected to grow by 2.7% this year – in Britain that would count as a boom.
Less developed economies are doing even better. Poland depends hugely on the eurozone market – that’s where the stuff from all its new factories goes. It grew by 3.5% in the first quarter of this year and that figure was seen as slightly disappointing. Not much sign of the euro crisis hitting that economy.
In truth, Britain, despite what you might sometimes read, does not depend that much on trade with the eurozone, and certainly not with the peripheral states that have suffered the worst from the crisis. We don’t make a lot anymore, and what we do make we don’t necessarily sell to Europe.
In total, exports account for 26% of GDP and the eurozone accounts for 46% of that, so exports to the eurozone are roughly 13% of GDP. Put that way, 87% of the economy has nothing to do with the euro. Even the 13% that does depend on the eurozone consists mostly of companies selling things to France and Germany, which have been expanding at the same rate as us, or slightly faster. So while confidence may be taking a hit, it is unlikely that actual sales have been greatly affected.
In reality, Britain isn’t growing because of deep structural problems with our economy. State spending is now up to 50% of GDP. Regardless of whether you think that’s the right number or not, the public sector has zero productivity growth and may well have declining output. That makes it very, very hard for the overall economy to grow.
Next, debt is too high. According to consultants at McKinsey, British debts total more than 500% of GDP once corporate, personal and government debt are added together. Only Japan is more in hock than we are. All the latest evidence suggests that very high debt levels restrict economic growth. Most of the rise in consumer spending in the last decade was financed by borrowing that isn’t available anymore. So consumers can’t spend more until they earn more – and they can’t do that until their productivity rises.
Lastly, the Bank of England seems committed to following the Bank of Japan on the road to nowhere. Japan has spent a decade with near-zero interest rates and regular blasts of quantitative easing. The result? An economy still stuck in the doldrums. While it may be defensible as an emergency measure, there is little evidence that quantitative easing can produce a sustained recovery – and by discouraging saving it may well make the economy more feeble.
It’s easy to blame the euro crisis for Britain’s zero growth this year. Certainly, it hasn’t helped. But most of our problems are of our own making. We could start to fix the economy if we wanted to, but if we keep blaming everything on Europe we won’t – and we’ll be stuck with zero growth for a very long time.