0.2% growth is cause for celebration!
With a protracted period of 'payback' underway - we shouldn't be fooled into thinking that the small growth in the economy was avoidable.
Things must be bad when economic growth of 0.2% is better than expected. And indeed, things are bad. But it is a mistake to think they could be much better.
To understand this grim sentiment you have to take a step back and think what has happened in the British economy over the last few years. UK household debt which barely budged from 63% of GDP between 1993 and 1997 rocketed to 100% in 2007. Between 1997 and 2008 the number of credit cards rose from thirty-six million to seventy-one million. In the same period our spending on holidays more than doubled to £1,068 per annum and spending on other forms of entertainment rose by 76% to £250 per month. Consumer debt topped £1.4 trillion in 2008. Britain went on a borrowing binge.
What is borrowing? The question sounds so obvious as to appear pointless but answering it explains why Britain’s economic recovery, and that in other similarly indebted nations like the US, is so anaemic.
Borrowing is the act of transferring spending from some future period to the current period. Obviously this means that in the future period, when you have to pay back the money you borrowed, your spending will be lower.
Unless, that is, you spent the borrowed money on something which raises your income in the future period. Bill Gates, for example, can probably afford to pay back what it cost to buy his first computer fairly easily. This type of spending is called investment but of all the borrowing that went on in the decade before the crunch very little of it went on this type of spending. Investment as a percentage of GDP was, in fact, lower than historical averages. We were borrowing to consume.
Business investment as a percentage of GDP
When this mountain of debt toppled over and buried the British economy in 2007 the government stepped in as ‘borrower of last resort’. The full effects of the cut backs needed to pay for what we consumed yesterday out of what we earned today were kept at bay. But when Ed Balls boasts of the strength of the recovery under Labour he is merely offering up a paean to the obvious short term boost offered by £150 billion of borrowed money.
And borrowed money wasn’t a remedy that could be applied to the economy by government long term. In the years before the crunch the Labour government had been spending like the most reckless consumer. The so called fiscal stimulus of government spending borrowed money had already been applied back during the boom when it wasn’t needed.
So here we are; In the future period having to pay back what we borrowed between 1997 and 2007 without the higher income we’d have if we’d invested what we borrowed and not spent it on houses, washing machines and holidays. Technically it’s called deleveraging. Paul Johnson of the Institute for Fiscal Studies calls it “payback time”.
With this in mind that 0.2% growth is actually pretty good news. The bad news is that all the economic activity which could only continue while people were spending borrowed money will cease when this borrowing stops. It has stopped among consumers and now the government can afford to borrow no more. That is why growth is slowing. That is why a double dip is a distinct possibility.
More bad news is that we have some way to go until we are out of the economic woods. Freiderich von Hayek wrote that “The magnitude of unemployment caused by a cessation of inflation will increase with the length of the period during which such policies are pursued”.
The same goes for borrowing. Individuals and government borrowed so much for so long that the period of payback, or deleveraging, is likely to be painfully protracted. According to a report from McKinsey, the process is “just starting”.
Britain, like the US, needs to move away from thinking that borrowing made it wealthy and rediscover that it was producing goods and services people were willing to pay us for that made it wealthy. This is the much talked about ‘rebalancing’ of the economy. But the impressive manufacturing figures of 2010 and early 2011 are wobbling with our trade partners increasingly concerned about whether they will default or whether they will have a currency left to pay us with.
The light at the end of the tunnel is flickering ominously.
The situation is grim but it will be no matter what. The indebtedness of our economies and the nature of that debt, pulling spending into the present with little thought for the future, guaranteed that when we woke up in the future, as we did in 2007, economic conditions were going to be brutal.
That is the painful reality and anyone who says it would be different if you ticked another box on a ballot paper are living in a dream world, the world many of us left when the credit crunch hit. In these circumstances 0.2% growth isn’t just better than expected; it’s a cause for celebration.
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