Saturday, 16 November 2013

When rising GDP isn't a 'recovery'. Part 1

There's a debate on LBC radio this morning about the prospects for and the nature of, the economic recovery currently underway in the UK. Here are a few facts, as I see them. Firstly, the UK's current recovery is the most pathetically weak of any in the last hundred years, including the period after the Great Depression. Secondly, real GDP is now growing and most forward-looking indicators suggest that it will continue to do so. And thirdly, so far real GDP per capita has not recovered noticeably, with the GDP recovery itself mostly due to an increase in the population.

I wrote about the economic implications of population growth a couple of weeks ago. An influx of people looking for work in the UK is keeping wages down, boosting demand and will in due course help boost output. But it is also placing huge demands on antiquated infrastructure (transport, utilities, education and the health system) which is a factor behind the UK's inflation rate being higher than it is in a lot of other countries. This is not the only reason the UK has higher inflation but it plays a large part. And so, wage growth is depressed,as new workers compete for jobs and real wages fall. Overall demand is boosted as new arrivals find somewhere to live and spend money; Housing costs go up in the South East as supply fails to keep up with demand. And that leads to a debate about whether there really is a recovery at all. I think there's a completely separate debate to be had about GDP as a measure of economic success. I'll get more coffee as I swap a frosted golf course for sun shining through the living room window, and then get into that but first I'll finish up on the UK 'recovery'.

Stronger growth and above-target inflation are beginning to put pressure on the Bank of England Governor and his MPC colleagues to increase interest rates. They are resisting this pressure, preferring to delay any policy tightening until the unemployment rate has fallen a good bit further. The pressure won't go away and with ex-MPC members debating the economic outlook and policy implications, I suspect that the MPC will struggle to maintain a united front through 2014.  Low rates will go on supporting house prices in the capital and South East (which is increasingly not seen as a good thing by the majority of people). Meanwhile, the pound is recovering some of the fall which followed the 2008 crisis. This is a good thing. The weak pound pushed up import prices and hurt consumer demand, more than it boosted exports (largely because the UK's main export markets in Europe were and remain very weak). A de facto policy of using sterling weakness to help re-balance the economy towards manufacturing was in my opinion both a mistake and a failure.

I suspect the difference between a recovery in 'GDP' and a recovery in real per capital disposable incomes will be a major source of political debate in the next couple of years. As, inevitably, will the social consequences of immigration. I am optimistic that the economy will benefit over time from being the go-to place for anyone in Europe who wants a job, but I do wish that this would trigger a response in terms of investment in the education, transport and regional development that would allow recovery to be shared across the UK and across economic sectors. Apart from anything else, if the UK doesn't do that, we'll have a truly terrifying trade deficit in about 5 years' time.

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