Here’s the good news – there was no ‘double-dip’ recession in the UK last year.
Between the fourth quarter of 2011 and the first quarter of 2012, we all thought economic growth had dipped by 0.1%. That put us in a technical recession, because the previous quarter’s growth was also negative.
Now it turns out growth was flat, according to the Office for National Statistics. Hence, no double-dip.
Whoop-de-do. I realise you’re now reaching for that bottle of single malt you only keep for special occasions.
But if you can restrain your joy and read on for a second, I do have some bad news as well…
Why the revisions to GDP matter
As one economic commentator told the FT, the 0.1% revision to GDP growth that erased the double-dip recession was “almost entirely irrelevant and merely an interesting piece of trivia.”
The really important news lay elsewhere in the report. And it was all bad.
Britain has been one of the slowest economies to recover from the financial crisis. Yesterday’s revised GDP figures made it very clear why that is.
Turns out that the economy shrank by 7.2% from peak (in early 2008) to the trough (in 2009). That’s a big jump from the initial estimate of 6.3%.
That might not be such bad news if the pace of ‘recovery’ had been revised up significantly too. But it wasn’t. So now, rather than being 2.6% smaller than it was in 2008, the economy is still nearly 4% smaller than it was then.
It could be 2015 before the UK regains its pre-crisis size again.
Fine, you say. But that’s all history now. What relevance does it have?
Well, let’s take a quick look at what this means. The UK took an even bigger hammering than anyone thought – quite a big deal, given that we were already one of the economies hardest-hit by the crisis. Yet, as Chris Giles notes in the FT, inflation has stayed the same.
Why’s that significant? Well, one argument to justify quantitative easing (QE) is that the UK has a whole lot of ‘spare capacity’. The basic idea here is that the credit crisis shut down factories and resulted in people being laid off temporarily. All the economy needed was a bit of stimulus to kick-start it again, and all this spare capacity would be picked up and put to work again.
And of course, if you have a lot of slack in the economy, then inflation should be weak. If there are loads of spare factories and workers and shops just lying unused, it should be easy and cheap to find the resources you need, when the economy starts growing again.
Trouble is, this argument effectively assumes that pre-crisis, the economy was on a sustainable path. In other words, that the perpetual motion machine of the City and the property bubble, which in turn fuelled a public sector spending bubble through super-charged tax revenues, was a fine way to run things. This model was not flawed, but merely interrupted.
Now, that’s clearly not true. And this revision makes that quite clear.
We need to restructure – instead the plan is to reflate
The alternative view is that Britain’s previous business model was unsustainable. The financial crisis demolished it. The machinery isn’t lying unused – it’s been smashed to pieces, beyond repair. There is no ‘spare capacity’ – or at least, there’s a lot less than there might have been.
In effect, the productive capacity of the economy has suffered a permanent blow. That in turn means that inflationary pressure is higher. Because there’s a much lower supply of resources and people who can actually do the jobs you might want them to do.
Again, this shouldn’t be too hard to understand. Just look at Britain’s industrial past. I’m not making any political points here, just trying to find a decent example to illustrate the point.
When the mines shut down, and miners got laid off, no one was arguing that there was suddenly a whole load of spare capacity in the economy. Those mines were gone for good. The jobs were gone for good. And sadly, a lot of those workers were in no position to get new jobs right away, if ever.
The financial crisis had a similar impact. Too much of what the economy was based on was unsustainable. It’s not just a matter of pumping enough juice into the economy until it takes off again. What we need to do is restructure.
But that doesn’t seem to be the government’s plan. If anything, the main goal seems to be to reignite the property bubble (from still over-inflated levels) before the election rolls around.
Meanwhile, we’ve got a new central banker taking the reins at the Bank of England on Monday. Sir Mervyn King – the outgoing governor – has very sensibly done a bit of a Pontius Pilate on the British economy. He’s washed his hands of responsibility and blamed the government’s desire to blow up a huge property bubble for any future disasters. When things go wrong, he can say: “Wasn’t me, guv.” Posterity might disagree, but his conscience is clear.
Mark Carney of course, has done the same for Canada – leaving just as things are going horribly wrong. A lot of people reckon that Carney won’t do much when he comes in. He’s only one man, with one vote after all.
I disagree. I concur with Richard Woolnough of M&G who cynically but sensibly noted at M&G’s conference yesterday that Carney had been hired by George Osborne to be a ‘dove’. Therefore, he’ll do something ‘dovish’. In the context of monetary policy, that means loosening. In turn, that’s almost certainly bad for the pound (so stay diversified – all those overseas and US-dollar denominated assets we’ve been recommending you buy).
And in the context of global jitters over the bond market, I do wonder how that’ll play out in the gilts market. MacroStrategy Partnership founder and regular MoneyWeek contributor James Ferguson looks at the consequences of QE for government bonds in our latest issue – and his conclusions are very different to what you might expect. If you’re not already a subscriber, subscribe to MoneyWeek magazine .
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