Three Cheers for Dull Growth

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

At one time when you would struggle to get a 0.6% rise in gross domestic product to lead the business pages, let alone every news bulletin. A 0.6% GDP rise, which we had in the second quarter, is pretty dull.

These days, however, dullness is good. After the excitement of recent years, including quarters when the Office for National Statistics shocked with a figure nobody expected, it was nice not to be surprised.

Quarterly changes in GDP in recent years have ranged from plus 1.3% (the second quarter of 2007) – a modest boom – to minus 2.5% (the first quarter of 2009), a spectacular bust. So 0.6% was a steady, safe number, neither breaking the speed limit nor driving so slowly as to be dangerous.

Indeed, if you could be assured of 0.6% growth, each quarter, for the next few years, most policymakers, I suspect, would grab it with both hands.

It would mean the hole in the economy left by the crisis was mainly permanent; by now in normal circumstances we would expect to be 13% above early 2008, not 3.3% below. But it would also mean our ability to grow had not been damaged for good.

Growth of 0.6% a quarter, roughly 2.5% a year, is close to what most economists would think of as the trend, or normal, long-run growth rate. It is a lot better than the Japanese “lost decade” rate of closer to 1% Britain has been achieving, on currently-available data, since the economy turned up in the middle of 2009.

Perhaps it was because 0.6% was in line with expectations it sparked a frenzy of navel-gazing about the kind of growth being achieved. This is the charge that the authorities failed to rebalance the economy away from debt and consumer spending and towards exports and investment. Though it was predictable the debate would shift from the lack of growth to the composition of it, I still get a little irritated by it.

This is not, remotely, a recovery led by consumer spending or household debt. Household debt has fallen in relation to annual household income, from just under 170% to just over 140%. We have the slowest consumer recovery of modern times, with spending still 3% below pre-crisis levels

The performance of exports and investment is indeed disappointing. But the Bank of England and Treasury were happy to preside over a huge fall in the pound to stimulate exports. The fact exporters have not responded as well as hoped (or when they have importers have responded in kind) reflects longstanding structural weaknesses and the time it takes to switch to the faster-growing parts of the world.

As for investment, the government has done its bit to make Britain a more attractive location for inward investment, at a time of huge strains on the public finances, by cutting corporation tax. By 2015 the rate will be 20%. When Nigel (Lord) Lawson cut corporation tax in the 1980s, it led to an investment boom. This time businesses have preferred to hold on to their cash.

Governmments and central banks can provide the incentives but cannot make the private sector do things it is unwilling to do. To judge from some commentary, you would think these things were in the gift of the authorities. But we do not live in a centrally-planned economy. All policymakers can do is lead the horse to water.

Nor would a recovery driven by even more government spending do anything for the cause of rebalancing, in fact the opposite. I have said many times the government got the mix wrong between current and capital (infrastructure) spending – the latter cut harder than it should have been. That is now water under the bridge.

The question is where we go from here. Can we maintain a 0.6% quarterly growth rate, and can we hope for better from exports and investment?

Recent surveys, including a strong CBI manufacturing survey, the regular purchasing managers’ surveys for services, manufacturing and construction, and others for property, housing and retail point to momentum in the third quarter.

The anecdotal evidence I pick up, from readers and others, also suggests more confidence in recovery than for some time. The “sod it” factor I mentioned a couple of weeks ago – we can’t carry on doing nothing – may be kicking in.

There are also more tangible reasons for cautious optimism. Nobody pretends that the eurozone’s problems are solved. Currently it is Portugal, who knows who next of the eurozone’s 17 members will be casting doubts on the ability of the single currency to ride out the crisis?

But fear of imminent collapse has faded, a year after Mario Draghi, the European Central Bank president, pledged to do whatever was necessary to preserve the system.

Perhaps as significant as Britain’s growth figure, there are indications, after six successive quarterly declines, the eurozone is returning to growth. Its composite purchasing managers’ index jumped to 50.4 in July, from 48.7 in June. Levels above 50 are consistent with growth. The European Commission says consumer confidence is at its highest since August 2011.

What happens in the eurozone is important. Uncertainties there have undoubtedly been a factor holding back investment and weak demand from Europe has stood in the way of a rebalancing of the economy towards exports. One reason America has enjoyed a better recovery than Britain (though weak by its standards) is it does not have the drag of Europe on its doorstep.

There are other reasons for hope. The squeeze on real incomes is easing, as earnings growth edges up and inflation heads bumpily lower. By next year, real wages may be rising. The money supply, for so long apparently immune to the Bank of England’s ultra-loose policy, is growing. Simon Ward, chief economist at Henderson Global Investors, says this is the key factor in the recent stronger performance.

So there are reasons to take heart, for believing that the second quarter’s 0.6% growth was no flash in the pan. We don’t like flashiness when it comes to growth. Dullness is a virtue. Let us have more of it.

This piece has been cross-posted from David Smith’s Economics UK with permission.