The last five years have been horrible for Britain. We’ve had months of, at worst, fast economic contraction, or at best, very slow growth. At the low point, GDP had slid by 7%. That is awful. But what if things have been even worse than the numbers show? Take house prices. The indices suggest the UK hasn’t seen a real crash. But that’s only true in the areas where most newspaper columnists live. Ask anyone on the outskirts of Newcastle: northern readers often tell me of houses that won’t sell even at 40% off 2007 prices. One emailed a fortnight ago with news of flats for £10,000.
Then there is inflation. We’ve all been conned into looking at the consumer price index (CPI) instead of the retail price index (RPI) as our default measure of inflation. Under CPI, inflation has been high enough. But it’s been even higher under RPI: look at inflation as we used to in the early 2000s, and it has been well above 3% for years.
Unemployment data has also not told the whole truth: there are huge numbers of income-free self-employed, and underemployment is a big problem. Even GDP might have fallen by more than 7%. Real GDP is calculated by taking nominal GDP and subtracting a ‘deflator’ to reflect inflation. But since 2007, the deflator the government uses has been rather smaller than the official measures. Use RPI instead, and Britain hasn’t left recession for years.
But if things have long been worse than the official data tell us, might it not be the case that the cyclical recovery that we are now getting clear hints of could be rather sharper than anyone expects? There isn’t yet much sign of the fundamental rebalancing that Britain badly needs, but exports are growing and there is some reshoring.
Even if the rebalancing never happens and our long-term debt-riddled decline continues (which is likely), the next few years could look good for Britain. Fast-rising house prices are the last thing we need in the long run, but they will boost the short-term numbers. At the same time, the fact that the number of people employed in Britain rose by 400,000 in June alone – the most since 1992 – is not to be sniffed at. We may even get to do some fracking.
What does this mean? You shouldn’t take your low mortgage rate for granted, for starters. Bank of England boss Mark Carney set a UK-wide unemployment rate of 7% as a marker for the beginning of the end of ultra-low interest rate policy. In June, Britain’s unemployment was 7.4% (the much-quoted 7.8% number is the three-month moving average). Gilt yields are already at a two-year high. With house prices on the up and employment rising fast, do you really want to bet on Carney being able to hold rates at 0.5% and avoid inflation doubling for that much longer?
He may want to hold rates at record lows for another three years (at least). But I’d be betting on a rate rise just after the 2015 election, rather than one in 2016.