The Bank of England, never very cheery, found much to be gloomy about in announcing a further £50 billion of quantitative easing (QE) on Thursday.
“Output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters …,” it said. “Business indicators point to a continuation of that weakness in the near term.”
The lights have gone out at the Bank. As recently as April it was saying the weakness of some official data was “perplexing” and the growth of activity was “likely, if anything, to have picked up” since the second half of last year. Now it appears to accept even the perplexing figures.
There may be a crumb of comfort in the fact that, given its dodgy forecasting record, the Bank’s gloom now could be a harbinger of better times ahead. But it is not much of a reassurance.
As for QE, the analogy is with adding petrol to a damp bonfire. Eventually it will explode into life and take your eyebrows off. But whether it fires up into growth or inflation is an open question.
The Bank is not the only central bank trying to inject a bit of oomph. The European Central Bank, with its rate cut to an all-time low of 0.75%, and the People’s Bank of China, cutting to 6%, acted last week.
Gloom is also affecting the government. Nothing reflected more badly on George Osborne than his obvious glee that, amid economic woes and budget U-turns, he thought he could pin the Libor-fixing scandal on Ed Balls, his Labour shadow. His attempt to do so, clumsy and evidence-free as it was, did him no good at all.
Why are things so gloomy? We are, as Sir Mervyn King has told us, affected by the “large black cloud of uncertainty” emanating from the eurozone. But there is also a specific British disappointment, which will be explored by Price Waterhouse Coopers (PWC) in its UK Economic Outlook to be published this week.
John Hawksworth and Yong Jing Teow of PWC split the past 15 years into three periods, the growth years of the “great moderation”, 1997-2007, the great recession of 2008-9 and the post-crisis “recovery” since 2009. They compared Britain’s performance, on a range of measures, with other G7 economies (America, Japan, Germany, France, Italy and Canada).
Not to spoil the surprise too much, the headline verdict is that Britain was close to the best in the G7 from 1997 to 2007 but was close to the worst in the recession and subsequent recovery.
The period 1997 to 2007 – Gordon Brown’s chancellorship – may have been unsustainable, debt-fuelled and ultimately irresponsible, as Osborne and others frequently say. Looked at purely in terms of the numbers, however, it was also something of a purple patch for the economy.
So growth, which averaged 3.1% a year, was second only to Canada in the Group of Seven (G7), and thus faster than America and the rest. Britain’s growth rate was nearly double Germany and more than three times the rate in “lost decade” Japan.
Inflation, traditionally our Achilles’ heel, averaged 1.6%, the same as Germany and well below America. Only Japan, suffering deflation, was lower.
Britain did OK on unemployment but spectacularly well on labour productivity, which at 2.2% a year was the highest in the G7. The weakest bit of Britain’s performance over the 1997-2007 period, which is not a surprise, was on the fiscal side.
The cyclically-adjusted budget deficit widened by 2.6% of gross domestic product over the period, while Germany and Japan narrowed their deficits. America, however, pushed the boat out even more than Britain, widening its deficit by 3.1% of GDP.
Combining these measures, Britain comes very near the top of the G7 league over the 1997-2007 period, doing particularly well on growth, inflation and productivity, all of which makes the subsequent performance all the more disappointing.
In the 2008-9 recession, for example, Britain’s GDP felly by 6.3% and only Italy and Japan did worse. The 5.1% of GDP widening of the underlying budget deficit was exceeded only by America’s 5.8%.
It is the past three years, however, that Britain’s performance has taken on seven-stone weakling proportions. Only Italy, with 0.4% annual growth, has done worse than Britain’s 0.9% since mid-2009. Germany tops the G7 with 2.9%, followed by Canada, 2.8%, America, 2.4%, and even Japan, 2.1%.
The inflation story has been horrible, Britain’s average of 3.6% being more than a percentage point above anybody else. Labour productivity has gone from the G7’s best to the worst. Is there anything we have been good at? The budget deficit has dropped by 2.6% of GDP, the same as France and more than anybody else in the G7.
Why, overall, were we close to the best, and are now nearly the worst? It is not hard to think of reasons why growth has been weak, including the high-inflation squeeze on real incomes, the fiscal consolidation – tax hikes and spending cuts – and the credit famine.
PWC’s Hawksworth sees some of the recent underperformance as payback for the good years. From 1997 to 2007 Britain was, on the numbers, a 3%-plus growth economy. Maybe it was never genuinely more than a 2% economy. Feast to famine on public spending and credit are symptoms of the shift. Some growth over 1997-2007 was stolen from later years.
What of the future? Is Britain condemned to be the poor relation of the G7, or for the current poor performance to persist into a lost decade?
PWC says not, and I agree. Growth, it thinks, will settle at just over 2% in future, below America (2.8%) and Canada (2.3%) but above Japan (1.5%), France (1.4%), Germany (1.2%) and Italy (0.1%).
Inflation will remain relatively high, though not particularly troublesome. Britain’s projected rate to 2016, 2.1%, is the highest in G7. But with the exception of Japan, most other countries are quite close.
A 2% economy – 2% growth and 2% inflation – would once have been considered dull and disappointing. Given the all-pervading gloom around at present, it now looks like Nirvana. If we can get there.
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
This post originally appeared at David Smith’s EconomicsUK and is posted with permission.
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