Is the British economy actually ‘healing’? Let’s look at the evidence

1:36 pm - May 21st 2013

by Duncan Weldon    

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The Chancellor has long been keen to tell us that “the economy is healing” and, according to the latest Bank of England forecasts, he might finally have some justification in saying this. At his press conference last week the Sir Mervyn King was able to revise up growth forecasts for the first time since the financial crisis hit.

The Bank now expects growth in 2013 to come in around the 1.2% mark, an upward revision from the 1.0% it expected in February and twice as high as the OBR’s own estimate of 0.6%.

Presented with this information, one response is to hail ‘Good news Britain’ and point out that the Bank now expects a recovery twice as fast as the OBR.

Another, and I would argue more correct response, is to note that whilst growth of 1.2% is obviously preferable to growth of 0.6% it is nothing to shout about.

Indeed the OBR expected growth of 1.2% in 2013 as recently as last December. The initial OBR forecast for 2013, on which the Government’s fiscal plans were based, was for growth of 2.9%. No one now thinks 2.9% growth in 2013 is remotely plausible.

The economy might be healing in as much as it is showing some tentative signs of growth but whether compared to the original forecasts, to international experience or to the UK’s own history this is an appallingly weak recovery.

As I noted a few weeks ago, on the IMF’s forecasts (as good as any) the UK is set to experience a lost decade of GDP per capita growth. This is not what a ‘healing economy’ looks like.

Real wages have fallen by a huge 8.5% over the past three years.

Even leaving aside inflation, nominal earnings have been falling since last summer. And, as James Plunkett notes on twitter, the level of people in employment has dropped since the end of 2012.

It is an odd recovery indeed that is accompanied by falling employment and falling incomes and it is even odder that anyone can look at the UK data and see much to celebrate.

So, if the labour market is stagnant and real incomes are squeezed, where is this modest recovery coming from?

One answer can be found in the housing market where prices are once again rising.

The early indications are that the Chancellor’s interventions in the housing market are starting to bear fruit, prices are heading north and activity is picking up.

The real worry now is that the Government’s housing interventions (that push up prices not building) will mean we get an increase in growth funded by yet more household debt.

Some will no doubt argue that a few years of faster growth are a better out turn than stagnation. Whilst this is true we shouldn’t kid ourselves that an asset price, consumer debt led recovery is a good, or sustainable, outcome.

A longer version of this post is here.

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About the author
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

We understood many months ago that Osborne had thrown in the towel on “expansionary fiscal contraction” as GDP growth disappointed quarter after quarter.

We now know that the Tory ideas cupboard is completely bare hence the reversion to type in attempting to stoke an asset bubble just before the next election.

Desperate stuff from a desperately poor chancellor and government. And given the Tory Party has recently imploded over issues central only to their own rotten identity – Europe and Gay Marriage – it won’t work as an election gambit anyway.

When Lawson pre-announced the end of double MIRAS it ‘bore fruit’ in the short term but then triggered a crash. Is Osborne just bringing forward demand in the same way?

From The Independent on Wednesday:

The International Monetary Fund has warned Chancellor George Osborne that the UK is “still a long way from a strong and sustainable recovery”, sending the pound tumbling against the dollar.

Assessors warned there is a key risk that persistent slow growth could “permanently damage medium-term growth prospects”.

After five years of relatively weak activity “additional measures are needed to raise long-term expectations of potential growth”, according to the report. [Independent 22 May 2013]

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