Mediamacro myth 7: the strong recovery

It was perhaps inevitable that when output did start growing again in 2013, everyone would breathe a huge sigh of relief, and extol what was happening. But that time has passed, and yet mediamacro - with few exceptions - has not told people the truth about the recovery. What they have not said is that the recovery does not really deserve that name. This picture tells you why.

The first point is to stop talking about GDP, and start talking about GDP per head. An economy that grows because it has more people in it is not obviously a good or bad thing, and from the government’s point of view - given its (missed) net migration target - it represents a failure. It is GDP per head that determines living standards, which is what matters.

Now if you were on a journey, and in one part of your journey you were delayed by 10 minutes because of a traffic jam, you would be relieved when that jam came to an end, but would you call moving again a recovery? Surely you would only talk about a recovery if you made up for some of that lost time. As the chart shows, we have failed as yet to make up for any of the ground lost not just in the 2009 recession, but also ground lost as a result of fiscal austerity in 2010 and 2011.

So we have not really seen a recovery. Maybe the pessimists are right, and we will never recover any of that lost output, but still you do not call it a recovery.

I can put it another way. Quarterly growth in GDP per head since the beginning of 2013 has averaged about 2% at an annual rate. That is below the average growth rate since 1955. A recovery from a deep recession would have growth rates well above the long term average.

So current growth is unexceptional, and nothing to write home about. The half-truth here is that growth elsewhere has also been poor, but largely because other countries have also implemented premature fiscal austerity. (In terms of GDP per head, both the US and Japan have done better than the UK since the recession.) But even GDP per head may be giving us an overoptimistic picture about average living standards. I’m going to break my one chart rule for this series to add this from the ONS. It plots GDP per head, and Net National Disposable Income (NNDI). The first measures production per head before depreciation, whereas NNDI measures income per head after depreciation.

NNDI has not increased at all under the coalition government, and the reason is that while overseas agents have been receiving some of the income from UK production, domestic residents’ income from overseas production has not been increasing by as much. This is a key reason why the UK current account deficit has been increasing.

In a nutshell, the prosperity of the average citizen in this country has hardly increased over the period of this coalition government - a result that is totally unprecedented since at least WWII. As recoveries from recessions go, this does not seem like a recovery worthy of the name. Yet we keep being told by mediamacro that the Coalition’s strong card is its economic record!

Previous posts in this series

(0) UK mediamacro myths: an introduction

(1) 2010 Britain faced a financial crisis

(2) Labour profligacy

(3) The 2007 boom

(4) The immediate necessity of belt tightening

(5) The long term plan

(6) 2013 recovery vindication

  

The US and the Eurozone 2012-3

If fiscal policy is important at the zero lower bound, why did the US recovery continue in 2012 and 2013 despite a large fiscal contraction? Or to put the same question in a comparative way, why was the Eurozone’s fiscal contraction in 2012/3 associated with a recession, but not in the case of the US?

GDP growth had been reasonable in both the US and the EZ in 2010 and 2011. While US growth continued into 2012/3, EZ growth collapsed. Yet as the chart above shows, fiscal tightening was only slightly greater in the EZ in 2012, and became considerably tighter in the US in 2013.

Before discussing this, it is important to make two important points. The first is that the macroeconomy is complex, involving important lags in behaviour and expectations of future events. For that reason alone, you will not get precise matches between causes and consequences by just eyeballing the data. Second, different fiscal measures have different effects, and trying to express the fiscal stance in one simple measure will always be a crude approximation. However, despite these qualifications, I think we can provide something of an answer to this question by just looking at the numbers. 

In comparative terms, there are two obvious answers looking at 2012. The first is the EZ crisis. Although this began in 2010, it reached a critical position in 2012, when Greece was almost forced out. It is hardly surprising in these uncertain circumstances that EZ investment fell by nearly 4% in 2012. The second is monetary policy. The ECB raised rates from 1% to 1.5% in 2011, and compared to the US there was no Quantitative Easing. Combining the two, monetary conditions tightened considerably in the periphery as a result of the crisis. There was no comparable crisis in the US, which allowed investment to increase by 5.5%.

Explaining 2013 seems more difficult. Monetary policy had eased in the EZ (although of course not by as much as it should have), and OMT had brought the crisis to an end. In the US there was considerable fiscal tightening. So why did the US continue to grow and EZ GDP continue to fall?

For the EZ one proximate cause was a sharp decline in the contribution of net exports. Net exports added 1.5% to GDP in 2012, but only 0.5% in 2013. If this contribution had been more even at 1% in each year, GDP would have fallen by over 1% in 2012, and stayed roughly flat in 2013. Fiscal policy continued to tighten, which also would have reduced growth.

In the US something else happened: the savings ratio, which had been elevated at 5.5% or above since 2009, fell to 4.5%. This could have been a result of fiscal tightening, but it seems more probable that it represented the end of a prolonged balance sheet correction. (The US savings ratio averaged 4.5% between 1996 and 2007 and the OECD’s forecasters expect it to fall further this year and next.) The OECD estimates that the US output gap in 2013 was -3.5%, which was much the same as their estimate for 2012. So growth of 2% did nothing to close the output gap in 2013. This was despite a large fall in the savings ratio, perhaps bringing to an end the balance sheet correction that began with the Great Recession. So US growth in 2013 should have been very strong, and the obvious explanation for why it was not is very restrictive fiscal policy.