Sunday, October 04, 2015
Those green shoots were always stronger than we were told
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.

History has been rewritten. What we were told was happening to the economy two or three years ago was not happening. Growth was stronger than the official figures of the time told us it was. Hundreds of “flat-lining”, “double-dip” and even “triple-dip” headlines were written in vain.

Nor is the process over. The revisions a few days ago to the growth numbers for 2011-13, foreshadowed here last week, are not the end of the history rewriting process. Indeed, we are still very close to the beginning. It will go on for many years.

Long after the figures have ceased to be of interest to anybody other than economic historians, they will carry on changing. There is nothing wrong with that. It is good that the Office for National Statistics (ONS) does not close the books. As new information comes in, or new methodology is adopted, the numbers are revised.

It is important to recognise, however, that these things matter. As I have pointed out before, comparisons between the current recovery and its predecessors are meaningless, because the data on previous recoveries has been through many more revision cycles than recent figures. One day, maybe in a couple of decades, we will know for sure whether this recovery was weaker than its post-war predecessors. We cannot know that with any certainty yet.

It also matters for the decisions that were taken at the time. Rupert Harrison, George Osborne’s former right-hand man, tweeted after the gross domestic product (GDP) revisions were released that they showed that Britain had enjoyed exactly the same growth since the first quarter of 2010, the last quarter before the coalition took over, as America.

He was right. Both Britain and America’s GDP have grown by 11.8% since then, better than the G7 average of 9.1% and the European Union average of 5.8%.

Harrison knows what it was like to be on the inside when the criticisms were raining down on the chancellor and even the International Monetary Fund’s chief economist said he was playing with fire. He had to put up with austerity critics unfavourably comparing Britain’s growth performance with that of America and attributing it all, not to Britain’s proximity to the troubled eurozone but to apparently misguided austerity. Well now we know, and in time we will know more.

Osborne did not bow to the pressure and abandon his deficit reduction strategy, but other chancellors might have done so. Instead, the new figures show that growth was stronger in 2011 at 2%, perhaps the year of maximum austerity, than in 2010, 1.5%.

When history is rewritten, it also reminds us that other decisions might have been different. Andrew Sentance, who was on the Bank of England’s monetary policy committee (MPC) at the time, reminds us that a 6-3 decision to leave interest rates on hold in February 2011 could have gone the other way had the MPC know then what we know now.

Though three MPC members voted to hike rates, others were deterred by the ONS’s initial estimate of a 0.5% fall in GDP in the final quarter of 2010. I know this was the case, from talking to some of those who voted for a hold at the time. It was known that exceptionally bad weather had depressed GDP by 0.5% but the expectation was that the overall number would still be flat. The fall spooked some MPC members and, of course, we are yet to see a rate hike more than four years later.

The new figures show, however, that GDP rose by 0.1% in the final quarter of 2010. There was no fall. Some would say the ONS saved the Bank from an error, in that any hike in early 2011 would have been reversed a year later when the eurozone crisis intensified. Maybe, but it would have re-established the principle that rates can go up as well remain stuck at just above zero.

History is history. What do the figures tell us about what is happening to the economy now? There is some evidence of a slight slowdown in growth in the third quarter but the broad picture is encouraging.

The caricature of Britain’s recovery presented by the new Labour leader and his shadow chancellor at their party conference last week was just that. In the past 18 months more growth has come from net trade (exports minus imports) and investment combined than from consumer spending.

There has been no debt-fuelled splurge. Real household incomes have risen by more since early 2014 than consumer spending. Even the current account deficit, Britain’s Achilles heel, has improved; the deficit in the second quarter, 3.6% of GDP, being just over half the alarming 6.3% of GDP gap recorded in the final quarter of last year.

We may also be moving beyond the productivity crisis. As had been suggested by the GDP and employment figures, output per hour rose by 0.9% in the second quarter, hitting a new record but – more importantly - showing decent growth.

Instead of strong employment, weak wages and stagnant productivity, the new phase looks to be one of slower employment growth, bigger pay rises and a return to something like normal productivity growth. The figures also suggest that inflation will not be at zero for too long. The rise in unit wage costs over the past year, 2.2%, was the strongest for three years. Much more of this and the MPC will start to think a lot more seriously about higher interest rates.

There remain challenges. The current account and budget deficits may be down but they are still too big for comfort. Productivity is 15% below where it would be had it followed its pre-crisis path, even after the latest improvement. Manufacturing is going through a stagnant phase.

The rewriting of history by the official statisticians reminds us, however, that even when things appear grim, they are often better than they seem Some of us knew this. Everybody should know it.