Since You Asked

Our growth fixation is positively baffling

‘It’s official. The UK is in a double-dip recession.’

Financial Times, Lex, April 25

That sounds bad.
I hate to split hairs, but there is no official definition of recession in the UK. But if you’d like to tell yourself we’re in a recession, don’t let me stop you. What’s happened is that the UK economy apparently shrank in the first quarter of the year; it also shrank in the final quarter of last year, and two consecutive such quarters typically earn the tag “recession”. I note that after pronouncing an “official recession”, Lex described this customary definition as “arbitrary and unhelpful”, which sounds about right to me.

You seem to be denying the seriousness of the situation.
I am not denying the seriousness of the situation. I’m just sceptical that we learnt much about it this week. The nation’s commentariat has become fixated on this question of whether the economy shrank over the last quarter because if so, we can call it a recession, if not, we can’t.

You are denying the seriousness of the situation.
The situation is serious, no doubt about it. The British economy hit a peak in 2008 and we’re still not close to passing that previous peak. This is unprecedented in living memory; even in the early 1930s a recovery sufficient to pass the pre-recession peak would have happened by now. By any reasonable measure, the British economy is in deep doo-doo. This makes the fixation on whether growth in the last quarter was slightly positive or slightly negative all the more baffling. What happened this week was this: the Office for National Statistics produced an early and uncertain estimate that the economy was two-thousandths smaller at the end of March than it had been at the end of December. If the ONS had instead guessed that the economy had been two-thousandths bigger at the end of March, I hardly think we’d all be dancing in the streets.

It would have been more welcome news.
Fractionally, yes. We’re treating the whole business as a black/white, pass/fail affair. In fact, it’s all shades of grey. Remember that we’ve already had negative quarters of growth in this non-recovery, in late 2010 and twice in 2011. This time, though, two of them were consecutive. To add to the murk, it’s worth bearing in mind these figures are often revised substantially.

So growth might not be negative at all?

Indeed. Or it might be even worse than we think. Although in this particular case, it’s probably worth pointing out that alternative indicators, such as surveys of business activity, are painting a rosier picture. Many City economists think that if there is a revision of these figures, it will be up rather than down.

Ah, those infallible City economists! So, is this all about austerity or is it the eurozone crisis?
What makes you think the two are mutually exclusive? Clearly neither is likely to help the situation. Although the ONS figures cast an intriguing new light on the austerity debate.

How so?

Take a look at the back page of the ONS press release and it breaks the numbers down by sector, showing how each has developed since 2008.

And what’s the story?
A couple of sectors have done very badly, for example agriculture is down more than 20 per cent and mining is down by almost a third. Others, such as construction and manufacturing, are down by 5 per cent or 6 per cent since 2008.

Has any part of the economy grown since 2008?
Well, yes. There is one sector.

Don’t keep me in suspense – what is it?
Government.

What?
Surprising, isn’t it? Well, strictly, “government and other services”, so it includes defence, the National Health Service and so on, but also private education and private healthcare. That sector of the economy has expanded by more than 5 per cent since 2008; health and social care has expanded particularly strongly.

What happened to austerity?
A couple of things. One is that the government hasn’t really cut much yet. The main austerity measures so far have been tax rises and they might have contributed to the slowdown in other sectors of the economy. So if this is what happens when government services are still expanding, you might enjoy contemplating what will happen when austerity really kicks in.

Also published at ft.com.

28th of April, 2012Since You Asked • Comments off