On Over Celebrating Mediocre GDP Growth

[danieldwilliam]

The government is trying to portray the UK’s recent return to growth as a vindication of their economic strategy of achieving growth through public sector austeriry leading to business confidence and lower interest rates.  Recent growth figures of about 1.2% per annum, and fragile growth at that, don’t appear to me to be the signs of an economy that is returning to normal after a successful Treasury intervention.

There are some patterns in the UK economy over the last decades.  You might argue that the current sitution is so unprecidented that previous patterns are of no use nor interest. You might be right, but they are what we have. I’m proposing to use them as a bench mark.  If the benchmark is appropriate then I conclude we are lower than expectation. If the benchmarks I’m using are no longer valid, then we have bigger problems ahead of us than we currently imagine.

UK long term trend growth is about 2.4%  to 2.5%. That is, each year on average since the Second World War our GDP has grown by about 2.4%.  There have been periods of recession, periods of slower growth. There have been compensating periods of faster growth.  More often than not when the economy suffers a shock and falls into recession it shrinks, has a spurt of strong growth, muddles about a bit, then shrinks again before growing strongly for a period then returning to trend.  Double Dip Recessions are the norm, rather than the exception.  The pattern from previous larger period of economic stagnation is that the period of muddling about is protracted before growth returns and when it returns it is stronger and faster for a longer period. 

The basic pattern is that something goes wrong, we stumble and then grow more quickly until we are about back where we would have expected to be had we not had the shock in the first place.

So, if we were expecting our GDP in 2020 to return to the same levels we would have expected to see if our 2007 GDP had continued to grow at 2.4% what kind of growth rate would we be expecting?  I calculate we would need to see a growth rate of 4%. That puts the annualised UK GDP growth figure for Q3 2012 of 1.2% starkly into context. 

And remember, to return to the position we would have expected to be in by 2020 we need growth of 4% every year for the best part of a decade. That’s about half of what China is expecting.

For us to return to expectation by 2017,  the end of the OBR’s medium term forecast, we need annualised growth of 5% in 2013, 2014, 2015, 2016 and 2017.

At current forecast growth rates we only return to our peak GDP from Q2 2008 in Q2 2014.  Essentially we are expecting 6 years of an average of zero economic growth.  That’s based on OBR forecast growth rates of 2.00% and 2.70% in 2013 and 2014. That’s about double what we are seeing today.  If growth continues at the much heralded 1.2% we don’t return to pre-crisis peak for another year and a bit after Q 2014.

1.2% growth is better than a poke in the eye with an austere stick but it is much much less then we would typically expect to see if we were coming out of a period of economic turbulence. If the Treasury's expecation is that we will return to our previous long term trend and eventually catch up with ourselves then we are still far off that pace, now and in OBR forecasts for future years.  If the Treasury think that we have permanently lost output from 2008 and that our longer term growth rates are now permanently lower than 2.4% then I think we all have some bigger problems than perhaps we realise.

Comments

[andrewducker]

I do think our expectations were wrong. I think that a chunk of our growth in the late 90s during the internet bubble was based on some people throwing money at things that weren't worth anything, and that when this crashed in 200/2001 we dropped interest rates and created a housing bubble that kept things afloat until it also crashed. We were also helped out a lot by China buying up a lot of debt in order to manage down its own currency, and cheap labour keeping prices of imports incredibly low.

Which isn't to say that we won't still grow, but I think that our growth will be lower than it was.

I do agree that the rest of the world catching up is a good thing. Both for them (for obvious reasons) and for us because it increases the size of the total markets we operate in, and will force a change in how the world operates.

[danieldwilliam.livejournal.com]

And that strikes me as at least as good an educated guess as anyone else’s.

But the implications of your view being correct are not fun. Mainly because I think we have already spent all the extra money your lower growth assumption brings in and maybe a bit more besides.


As a tangent I worry that holders of capital couldn’t find some assets more productive to invest their surplus cash in than a series of bubbles. I think that’s a bit of a worry for the labour forces of the West mainly, but also the East.

[andrewducker]

No, the implications definitely aren't fun! We'd better hope that we invent our robot overlords quickly!

Of course, the holders of capital (pension funds, etc.) need to outpace inflation, preferably by several percent, in order to not be in rampant arrears all the $%^$^% time, because of the way they're structured (and the fact that we need to support ourselves for 30 years after retirement, having only worked for 40 years). So they invest in whatever is seen as safe, and also gives a high rate of return. So when the credit ratings agencies say "Packaged sub-par mortgages? Totally AAA!" they all pile in.

[andrewducker]

Great article here from The Guardian:
http://www.guardian.co.uk/commentisfree/2012/nov/14/austerity-here-to-stay

[danieldwilliam.livejournal.com]

Interesting article. I’m not sure I share Kettle’s view (as implied) that the rise of China is going to result in low growth for the UK.

Nor do I share Ryan Bourne of the Centre for Policy Studies response that low-tax, low-regulation policy responses are the only answer or an entire answer.

http://www.cps.org.uk/blog/q/date/2012/11/15/there-is-no-global-race-and-prosperity-is-not-zero-sum/

The OECD report on which both of these articles are based see UK GDP trend growth to 2011 as 2.3%. Over the next few decades they forecast 1.9% then rising for the three decades to 2060 2.2%.

For per capita GDP growth the figures are 1.9%, 1.3% and 1.8%..

1.9% GDP growth on average over the next two decades is okay. I’ll take that. Compared to the effectively zero growth we’ve seen for the last few years 1.9% growth is going to feel like paradise.

Big assumption in the OECD forecast is that people continue to retire at 65. Which I personally just don’t see happening. Either structurally in terms of the rules or through individual choice.

[andrewducker]

I can live with 1.9%.

I think Labour had a kind of bargain with the ultra-rich - they would bring in The Money at high rates, and in exchange inequality would be swept under the carpet. With a low rate of growth, I hope that they'll be willing to make the same deal.

[danieldwilliam.livejournal.com]

I recommend the blog of Hopi Sen for a discussion from a Labour point of view of how to do fiscally conservative (i.e. balanced budget) social democracy in the early 21st Century.