Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 2 January 2015

How good has the UK recovery been?

In the next five months we will hear a lot about the strength of the UK recovery since 2013. Forget 2011 and 2012, certain people will say, it is finally coming good. To assess the validity of these claims, we can look at the latest ONS data for output per capita. It is important when comparing this recovery to previous experience to use GDP per capita rather than GDP, because population growth has been much more rapid in the last decade compared to the previous three. GDP per capita rather than GDP is a more relevant measure of average living standards. Here is the annual growth in UK GDP per head since 1980 (source: ONS).


The recession of 1980/81 was followed by years of over 2% growth. The ‘ERM recession’ likewise. In contrast, after the 2008/9 recession we have had a very weak recovery. Even growth in 2013 is well below the 1971-2007 average of around 2.2%. Only in 2014 do we seem to have got back to trend. Here are recently quarterly growth rates.


The trend quarterly growth rate is about 0.55%, so only in the last two quarters is there even a hint of exceeding that trend. So the best that can be claimed about growth so far is that we have in the last two years managed to return to trend growth. We have made no progress in getting back the ground that we lost in 2010-12, let alone recoup the ground lost in the recession.

Isn’t this true elsewhere? Only if we look at the Eurozone, which in 2013 also had levels of GDP per capita well below 2007 levels. In the US and Japan GDP per capita exceeded 2007 levels (just). So the UK has matched Eurozone performance, but without having to contend with an existential funding crisis.

Now maybe it might still be worth talking up the recovery if it included the promise of better times ahead. This could be the case, for example, if it had occurred despite a large rise in consumer savings, or because of a strong increase in net exports. Unfortunately in both cases the opposite is true: the current savings ratio appears pretty low, and our trade performance has been poor despite the depreciation during the crisis. This change in the terms of trade has also made consumers poorer than the GDP numbers would suggest.

So even if we exclude the years 2011 and 2012, this looks like a below par recovery by most standards. Economists who suggest otherwise are looking at their prejudices rather than the data. To what extent this is down to the government or something else is another issue. What it does suggest is that the government should be explaining why they have been unlucky, rather than boasting of their success.


29 comments:

  1. Simon. ONS "Measuring National Well-being: Economic Well-being". http://www.ons.gov.uk/ons/dcp171766_358832.pdf , uses RNNDI and RAHDI as metrics that get nearer the truth for households than GDP per capita. The shift upwards in the GINI index for both wealth and income is making GDP per capita somewhat redundant.

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    1. I agree that these are also interesting numbers to look at. However at the moment there are much longer lags in getting the data, and I'm also not sure how far back these measures go, so in that sense they are not as good as GDP per capita in trying to assess the current recovery.

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  2. i would say that the ONS website sucks, but with BLS and FRED, I'm hardly in a position to complain
    Thank god for the admins at ONS BLS and FRED, that they don't have to answer to ordinary cticizens, or they would all be fired

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  3. Why in your last sentence 'unlucky'? When a great deal of the poor recovery may be directly attributable to wrongheaded austerity policies, as you so often highlight. (Or has the sarcasm gone over my head!)
    As you have also highlighted, the government has been very lucky over the past 4+ years, given the labour productivity decline and the resultant significantly lower than otherwise unemployment levels
    http://mainlymacro.blogspot.co.uk/2014/07/why-strong-uk-employment-growth-could.html

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  4. "What it does suggest is that the government should be explaining why they have been unlucky..."

    Tory Governments are always unlucky, since they have to take over from failed Labour Governments. By the same token, Labour Governments always look good to begin with, since they take over an economy the Tories have fixed, and then the rot sets in.

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    1. Unfortunately this is almost entirely untrue (for at least the last 40 years), as even a cursory consideration of the economic data together with general election dates show. One such example being the 1980-81 recession and soaring unemployment as a result of you-know-who's policies (the disasterous MTFS of attempting to target the money supply), with the economy having just started to recover following the exogenous (not Labour created of course) oil price shocks of the 70s.
      SWL has twice addressed the issue of macro-economic competence of both Labour and Conservative governments in recent decades, and I'm afraid it doesn't make for comfortable reading for anyone who subscribes to your unfounded, incorrect and evidence free claims. I am no labour supporter by the way, just keen for a little more accuracy and fewer falsehoods in economic/political discourse. I'd suggest ou read both of the following posts, then ask yourself if your above comment remains valid.
      http://mainlymacro.blogspot.co.uk/2014/11/why-are-conservatives-so-incompetent-at.html
      http://mainlymacro.blogspot.co.uk/2014/11/left-right-and-macroeconomic-competence.html

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    2. Conservative governments always start with a compulsory period of three years of slash and burn the public sector. Most recently Major did it and Thatcher before him. Conservatives still think we are on the Gold standard, and hence their economic ideology is still stuck in the Dickensian era.

      Osborne has repeated the tradition with the result that the UK economy is now three years behind where it would have been under Mr Darling. The last thing the UK economy needed in May 2010 was Osborne "austerity", just when Darling, with an eleven percent deficit was just getting the economy to lift off the runway.

      Fortunately, the deficit is still eighty odd billion (instead of the zero forcast), which at the moment is paying for the imports. The private sector is treading water and praying we don't get another three years of slash and burn the public sector, Osborne style.

      If we do, be prepared to up your borrowing if you want to maintain your lifestyle after May 2015.

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  6. Is the a study of (gdp per capita) divided by (government spending)
    Comparing each of the EU countries, the US and Japan since, say 1995 ?

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    1. http://www.theguardian.com/commentisfree/2013/apr/18/tax-competition-mythbuster
      LOOK AT THE GRAPH

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    2. thanks for the link :-)
      it is pretty much what I wanted, except I was really looking to see if there was a direct correlation between government (spending-revenues) ie stimulus, and economic growth per capita, and to compare it across countries.
      I'll check Piketty data source perhaps.

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  8. Thank you for this SWL. I am delighted that I can finally validate an armchair opinion that I have been touting! Great to see Krugman giving this a plug.

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  9. The politics seems to be getting in the way of the economics here. You have selectively taken the one measure (productivity) that shows the current coalition's performance in a particularly bad light. This rather over simplifies and obscures the question on whether the coalition and our economy have done (relatively) well over the last 5 years. Clearly this is an important point of discussion as we run into an election and more rigorous insights would be helpful. The fact is that 2010 was a very different time to today has been discounted - there were serious questions as to whether the UK was a "going concern" and the coalition's austerity policy at least put this to rest. Osborne probably should have eased off the austerity pedal earlier than he did - but hindsight is always helpful! To have created over 1.5m private sector jobs whilst making progress on the deficit is not a bad effort given what they inherited.

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    1. well, most countries inherited the global crash. I'd like to see how stimulus comparisons worked out over the period, say 1995 to date. eg did the US stimulus provide good bang for buck, how about Japan, comparatively.
      We know the EU didn't do much stimulus (yet), and faces deflation.
      And the UK appears to have started on the same course as the EU with austerity, but delayed/abandoned it. I think a line graph would show how good/bad the effort has been compared with other major economies.

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    2. Using GDP per capita is a standard way compare changes in average prosperity over time - hardly a political choice. I'm afraid when you say that there were serious questions as to whether the UK was a going concern in 2010, you have swallowed the myth that Osborne has created. Show me any evidence that suggests that is true. Austerity may have cost the UK economy around 5% of GDP - I'm not sure any other Chancellor in living memory has achieved that.

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    3. David

      I note this post of yours.

      http://getwd50.blogspot.co.uk/2014/11/winning-productivity-race.html?m=1

      This bit in particular stood out:

      "The consequences of low investment are plain to see already; falling wages, growing inequality, increasing migration, falling demand and lower growth. It is our number one duty to arrest this decline in investment and productivity – we need to think the unthinkable. The only way trigger up-tick in investment this is for Government to take the lead."

      I couldn't agree more that the productivity stagnation is the most urgent problem that we face (although it's strange that, having stated this not 7 weeks ago, you snipe at SWL for having "selectively taken the one measure (productivity) that shows the current coalition's performance in a particularly bad light.")

      What I find stunning is that, 7 years into the crisis, you talk about "Govt taking a lead" as if it were a dazzling new insight.

      Krugman often goes OTT in his criticisms, but in saying that we are in a Dark Age of Macro, where the lessons learned by people who knew the subject have been forgotten, he is spot on.

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    4. Maybe it suited Osborne to magnify the dangers in 2010 but the reality was that our deficit was 11% of GDP and our borrowing cost were over double what they are today. It was at least a strong possibility that more expansionary policies could have pushed real borrowing rates much higher (as happened in much of Europe) and this would have ultimately resulted in more austerity not less.

      On the selective approach to performance measures; to more or less ignore the strong performance in employment, inward investment is a mistake - sure we have had to replace over paid banking jobs with new jobs in new businesses that pay less but I am not sure that this all bad news.

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    5. I wrote this post nearly two years ago, and I think it still sums up my views.

      http://mainlymacro.blogspot.co.uk/2013/02/the-final-verdict-on-george-osborne-as_23.html

      I agree in 2010 it was not clear to many that the Eurozone crisis was a peculiar Eurozone problem that would not be replicated outside - that became clear in 2011. That was why the IMF changed their views on fiscal policy in 2010 - something that in hindsight they realise was a mistake. But the Conservative austerity programme made no attempt to protect demand. In particular public investment was immediately cut - something that was not even required under their fiscal rules. From what I can infer Osborne just did not think he needed to worry about aggregate demand effects - and that was a clear macroeconomic mistake, which most macroeconomists would not have made. Someone who ignores expert advice, and wastes resources of the order of 5% of GDP as a result, deserves full censure.

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    6. Thanks for answering my post. I enjoyed your piece from 2013 (written just before recovery started) it was both interesting and balanced. I still disagree with the main tenant, which was that Osborne should have changed direction earlier (2011 not 2012) as this would have required amazing foresight and better political nerve that Osborne will ever have. But if we agree that he was 12 months too late does this really account for 5% loss of total resources? Maybe, but that is a pretty harsh assessment.

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    7. I think the cuts to public investment indicate a total disregard for the impact of austerity on demand. These cuts were not required by his fiscal rules. The multipliers from public investment are likely to be particularly large. In addition, the austerity package could have been back loaded to protect the recovery, which would have meant that little damage would have been done when the panic ended in 2011/12. These are major errors. As I said, it appears as if he thought he didn't need to worry about demand - a major macro mistake, which at the ZLB can be very costly. The fact that he plans to make the same mistake again is difficult to believe.

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    8. Come on guys - the idea that George Osborne is personally making these economic policy decisions is beyond laughable.

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  10. Is Japan a success? GDP per capita has consistently grown and is above the U.S. growth since 2007, even in US$.

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    1. Japan seems to have adopted continual deficits as a solution to deflation.
      and why not? as long as the government debt is in it's own currency (ie not much external debt), could it not be written off when desired (Chicago plan, Benes et al) ??

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  11. I agree that the recovery is below par. I would even argue that the so called UK 'Recovery' has been brought by selling off housing, education & healthcare.

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  12. It's rather ironic that the raw GDP number looks better than GDP per capita due to the amount of immigration. The tories are lucky that they failed to deliver the reduction in immigration they promised. If they had succeeded I suspect both numbers would be worse.

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  13. It amazes me how people apparently do not see through the Tory 'austerity' ruse. It is merely a (rather obvious) smokescreen to cover their main economic policy - selling off public sector services to their supporters. Osbourne's laughable bluster about eliminating the deficit in 5 years (er...that'll be this year then!) was never remotely intended to happen - they were perfectly aware it was a ludicrous ambition. In fact, given the continuing size of the deficit, it is reasonable to say 'austerity? What austerity?' The only austerity has been in cuts to public services, for the reason given above.

    And finally, can we please stop this childish habit of labelling George Osbourne as a sort of sole decision-maker of Govt economic policy. It would be inaccurate enough if he was a towering intellectual economist, let alone the ghastly little PR man (and bestist chum of the similarly skilled PM) that he is.

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    1. Edit. Might help my credibility if i could spell Osborne correctly lol

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