The IMF is predicting a ‘lost decade’ for the UK
9:15 am - July 23rd 2012
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On Friday we got the IMF forecasts for the UK economy out to 2016 and I as noted they are considerably weaker than what the OBR are currently estimating.
What I didn’t quite realise was just how bad the medium term IMF forecasts actually are.
Since around 2008/2009 there has been an undercurrent to the UK economic debate asking if we will experience a Japan-style lost decade, a decade of low growth. Well, on these IMF forecasts that debate is pretty much over because that’s where they think we are heading.
The chart below shows UK GDP 2007-2016 (2012 to 2016 IMF forecasts) compared to Japan 1991-2000.
The really striking thing is how similar the economic debate in Britain today is to that of Japan in the 1990s.
Something previously noted by Paul Krugman:
The slowness with which Japan’s economy deteriorated was in itself a source of much confusion. Because the depression crept up on the country, there was never a moment at which the public clamoured for the government to do something dramatic. Because Japan’s economic engine gradually lost power rather than coming to a screeching halt, the government itself consistently defined success down, regarding the economy’s continuing growth as a vindication of its policies even though that growth was well short of what could and should have been achieved. And at the same time, both Japanese and foreign analysts tended to assume that because the economy grew so slowly for so long, it couldn’t grow any faster.
So Japan’s economic policies were marked by an odd combination of smugness and fatalism – and by a noticeable unwillingness to think hard about how things could have gone so wrong. (My emphasis)
His point that the government in Japan defined growth that was “well short of what could and should have been achieved” as a sign of success is vitally important.
No-one is suggesting that UK GDP will continue to contract until 2015, but that isn’t what a ‘lost decade’ means. The IMF thinks that the economy will grow (overall) in 2012, 2013, 2014, 2015 and 2016, just not fast enough. Weak growth cannot be allowed to be defined as success.
On the current IMF forecasts GDP will be around 10% higher in 2016 than it was in 2007. By any historical measure that is an awful result, as the graph below makes clear:
We’re half way through what is turning out to be an awful decade and yet the government refuses to take action, what a depressing state of affairs to be in.
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Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments
It’s be interesting to see how this compares to its forecast for the eurozone. All I can find is a prediction of 0.7% next year – half its prediction for our growth.
I’ll say it again – as I have about the IMF predictions for a while – one has to wonder why the IMF is as optimistic about UK growth as it is.
They are predicting an annualised growth rate of 1.8% over the next two quarters. That’s following two years of no growth, and a last quarter of contraction at 0.3%.
With no sector showing much signs of an upturn – the only hope of that coming true is that the Olympics proves to be worth maybe 1% of 2012 GDP on top of other activity staying as it has.
It is possible I guess – but it seems unlikely.
Difficult to know where to start when critiquing Krugman’s view of Japan’s economic history as is analysis of what was wrong is so flawed and his policy prescriptions mostly wrong.
Very simply Japan had a massive boom in its financial and real estate sectors in the 80s. Driving up private sector debt massively. A banking crisis was teh result.
The government didn’t however do nothing. It embarked on masses amount of fiscal stimulus. Mostly unproductive (bridges to nowhere) and environmentally damaging (all those concreted rivers).
And none of this worked. It just delayed the inevitable need to write off bank bad debts and restructure the banks and the thousands of zombie firms kept alive through zero interest loans.
It basically aimed for short term damage limitation at the expense of long term damage to the economy.
Sound familiar ?
One of the features of the Japanese economy over the last twenty years has been high levels of household saving. The Japanese nation is the “oldest” in the world – its birth rate has been falling steadily since the 1950s and has been well below replacement level for quite some time. One possible explanation for the high saving level is that people in their 40s and 50s were saving for their retirements. They are now beginning to retire – and surprise, surprise, the pendulum is swinging from saving to spending. But this is not necessarily a positive sign, if all that is happening is that retiring Japanese are drawing their pensions. They are dreadfully short of younger people.
If we are going to compare the UK with Japan, therefore, we should consider the demographic trends of the UK. We too have an ageing population, though we aren’t as far below replacement level as Japan, and our baby boomers are also starting to retire. Are they going to draw their pensions too? If so, then the economy may recover faster, though it still leaves a problem – too few younger people supporting too many elderly.
It does look to me as if the reasons for Japan’s stagnation, and the reasons for the UK’s feeble economy, are different. Japan can blame demographics. We have no such excuse. It is simply poor economic management.
I’m no expect, don’t pretend to be, but from what I’ve seen I’m not surprised.
Who’d have thought that this government doing all they can to strip disposable income from almost everyone, while handing more cash to those at the top who just seem to sit on their riches (and let’s face it, trickle down economics sure as hell doesn’t seem to be working), would mean customer spending would dry up, and consumer confidence would crumble?
To me it’s fairly simple, the people at the bottom pretty much HAVE to spend almost all their income each month, which keeps finances flowing.
Those on benefits, including the majority of them who are working, are the ones doing most of the spending, and they can no longer afford to.
Also, they’re far more likely to spend their money locally, rather than investing it offshore and internationally.
At a debate about the future of the UK, I asked government member, Jo Johnson, MP, brother of London Mayor Boris, if Britain could be a number one economy again. He said no, because the UK only has a population of around 60 million. This doesn’t make sense to me, as Australia only has a population of around 23 million, and yet the IMF recently predicted that Australia would be the best performing major advanced economy in the world over the next two years. Why not the UK?
To see the YouTube video of my question and Mr Johnson’s reply go to:
http://youtu.be/IpvOOqMd6Ww (55 seconds)
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[…] The politics aside – this is a disaster for ordinary working people. As Duncan Weldon pointed out – we are looking at a ‘lost decade’ in the UK thanks to ineffectual Tory […]
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