Sunday, May 04, 2014
Milestones that show the nightmare is over
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Milestones are either in sight or have been passed. The latest quarterly rise in gross domestic product (GDP), 0.8%, takes us within a whisker, 0.6%, of its pre-crisis peak.

“Onshore” GDP, excluding North Sea oil and gas, is already 0.4% above pre-crisis levels, because of the weakness in recent years of Britain’s offshore energy production (Scotland please note).

There are other games you can play with the figures. Exclude financial services where the whole thing started - but which has seen a 21% slump in activity - and GDP is 2% or so up on its peak.

Allow for the inevitable statistical revisions and we will discover, at some stage, that GDP recovered to pre-crisis levels some time ago, That is for another time.

The significance of these GDP milestones is that we are waking from the nightmare Britain entered almost seven years ago, when the financial crisis hit.

At times it has been a close run thing. In 2010, when the general election was inconclusive and eurozone collapse began to loom large, Britain teetered on the brink of a full-blown fiscal crisis.

The failure of recovery to take off prompted worries Britain was turning into Japan, lost decades of stagnation and high unemployment in prospect.

Even early last year, when the fear was of a triple-dip recession and an increase in the budget deficit, it was touch and go. There were a lot of worried people in the Treasury and Bank of England. But growth came through just in time, a strong 3.1% rise in GDP in the past year. The double-dip never happened, let alone a triple one.

It has taken time to get back to the pre-crisis peak. One reason for that was the depth of the recession: the 7.2% drop in GDP in 2008-9 was much bigger than America’s 4.3% fall.

After that, several factors came together to put a dampener on recovery. They included tax hikes and spending cuts, though these were no more of a factor than the eurozone crisis, the high inflation squeeze on real incomes and the sudden shift from easy credit growth to no credit growth at all, effectively cutting off the economy’s oxygen supply.

Perhaps as important as all these was the time factor. Carmen Reinhart and Kenneth Rogoff, the influential American economists who in their book This Time is Different examined previous financial crises, highlighted this.

Taking nearly seven years to get back to pre-crisis levels of GDP, and perhaps 10 years to return to pre-crisis levels of per capita GDP (population has grown since the onset of the crisis) is not untypical. We should perhaps have been a little more patient.

One of the effects of “balance”, as operated by the broadcasters, is if a report on an important economic number includes George Osborne, it also has to include Ed Balls, his Labour shadow.

So viewers and listeners were treated to the shadow chancellor’s view that the economic upturn was only working for the rich and that “most people are not feeling any recovery at all”.

I think I even heard him suggest that wages increases should be measured against the retail prices index rather than the consumer prices index. People may have forgotten that, as Treasury chief economic adviser and Gordon Brown’s right-hand man, Balls was instrumental in the 2003 Bank of England switch from an RPI-based target to CPI.

Is it true that for most people the recovery is a mirage and the cost-of-living squeeze is as intense as ever? A few days ago the latest GfK-NOP consumer confidence index, which has been running since 1974, was released.

It showed overall confidence at its highest level since June 2007. Optimists outnumber pessimists about their personal financial situation over the next 12 months and the country’s prospects. You would not get results like this if most were feeling as grim as Labour suggests.

The other important clue is in the labour market numbers. Apart from showing continuing strong rises in employment, they demonstrate that the benefits of recovery are not only well spread but that, if anything, the highest paid are lagging behind.

So private sector pay in the most recent three months was up by 2%, outstripping CPI inflation. The private sector accounts for 81% of employment.

Even more interesting was the breakdown, Manufacturing pay in the latest three months was up 3.2% on a year earlier, construction by 3.1% and “wholesaling, retailing, hotels and restaurants” - hardly bastions of high pay - by 3.5%. Not only were these increases comfortably ahead of CPI inflation (now 1.6%) but they also outstripped RPI inflation (currently 2.5%).

If you want to shed any tears, shed them for those in finance and business services, where pay was up just 0.1%, dragged down by falling earnings in financial services. This is a mirror image of the picture suggested by Labour.

Telling people they are squeezed and hard done by may be politically smart; few people are satisfied with their lot. I was always surprised during the long upturn from the early 1990s to the start of the crisis how much discontent there was. Consumer confidence is now higher than its average over that long upturn.

But we should also be honest. The rise in GDP is well spread between the different sectors of the economy and it is benefiting the majority of people. The longer the recovery in GDP goes on, the more those benefits will spread.

That recovery is not guaranteed. There are political risks, most notably next year’s general election. There is also the question of how the economy will respond when the Bank starts to raise interest rates. But the nightmare looks to be over. And that is worth celebrating.