New research argues poor recovery is due to a major productivity crisis
GDP dropped 6.3% from its peak in 2008 and is still around 3% lower than that today, with average annual output growth from 2008 of -0.7%. This means that five years on from the financial crisis we have still only recovered half the loss to national income which occurred in the immediate aftermath. This is the worst and slowest recovery from a major economic shock in 170 years.
The research, Will flat-lining become normal?: An analysis of Britain’s worst period of peacetime growth since the industrial revolution (by economists Tim Congdon CBE, Joanna Davies, Haroon Fatih, Dr Andrew Lilico, Robert Sierra, Peter Warburton and Trevor Williams), shows that the poor recovery is due to a major productivity crisis. Therefore, further increases in aggregate demand won’t help the economy. The economists identify seven key reasons to be pessimistic about the UK’s growth rate over the long-term. They are:
· Increased government spending and taxation as a proportion of GDP. This factor alone has reduced the sustainable growth rate by around 0.5% – possibly more.
· Increased regulation of the energy and financial services sectors. These sectors contributed substantially to the productivity performance of the economy in earlier decades.
· The depletion of North Sea oil.
· The arithmetical effect of low-productivity immigrant workers being added to the working population.
· The huge growth in credit before the crisis, followed by its contraction since – partly driven by increased banking regulation. Easy access to cheap credit fostered the creation of excess capacity in the construction, real estate development, distributive and financial services sectors, for example. Not only was their growth rate unsustainable but their peak level of activity was also artificial. Post-slump, the viable economic size of these industries may remain below their prior peaks for an indefinite period.
· Increased government, corporate and household debt relative to GDP.
· Demographic pressures from an ageing population.
The instinctive desire to reclaim the economic heights of late-2007 or early-2008 may not be consistent with the return to a sustainable path of economic development. In these circumstances, another fiscal boost to aggregate demand, as some advocate, would deliver inflation rather than increased real activity.
If we want to get back to sustainable growth rates of around 2% or more over the long-run, the research suggests very bold reforms will be needed including: the rolling back of government activity and influence; the regeneration of affordable credit channels to unencumbered households and businesses; and the implementation of radical supply-side measures.
Commenting on the paper, Prof. Philip Booth, Editorial Director at the Institute of Economic Affairs, said:
“People shouldn’t get too excited about better growth figures and recent forecasts from groups such as the OECD. We still have a long way to go before we recover the loss of output from the 2008 crash. Furthermore, the medium-term prospects for growth do not look healthy unless the government determinedly reduces government spending and regulation.”
“The recovery since the financial crash has been the weakest in industrial history. Many of the government’s critics wish to solve the UK’s growth problem by increasing government spending and borrowing. This research shows that Britain’s growth problem is a productivity problem and not a problem caused by insufficient government borrowing. The government should take note. The solutions lie in its hands.”
Notes to editors
Please note the section of the paper regarding productivity of immigrant workers is not an argument against immigration, simply an observation about the impact on average productivity. It does not in any way lead one to conclude that immigration should be reduced, it simply assesses the impact on productivity and shows the arithmetic consequence of much of the UK’s immigrant labour being relatively unskilled.
To download the paper, click here
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Tim Congdon CBE was a member of the Treasury Panel of Independent Forecasters (the so-called ‘wise men’) between 1992 and 1997, which advised the Chancellor of the Exchequer on economic policy. He founded Lombard Street Research, one of the City of London’s leading economic research consultancies, in 1989, and was its Managing Director from 1989 to 2001 and its Chief Economist from 2001 to 2005. He is currently chief executive of a small consultancy business, International Monetary Research Ltd.
Joanna Davies is a Senior Economist at Economic Perspectives. She has co-authored papers for the Central Banking Journal (‘Inflation Targeting: a child of our time?’) and the Centre for Policy Studies (‘More producers needed: why tackling workless households can lead to growth’).
Haroon Fatih joined Economic Perspectives in May 2011. Prior to joining Economic Perspectives he graduated with an MSc in Economics from the London School of Economics and holds a first class honours BSc in Economics from the University of Essex.
Dr Andrew Lilico is Chairman of Europe Economics, a member of the IEA/Sunday Times Shadow Monetary Policy Committee, and a commentator for the Telegraph.
Robert Sierra has worked as an economist for over 10 years, joining Economic Perspectives in September 2010. He has previously worked for Sumitomo Trust & Banking as a market economist covering the UK and Eurozone economies. Robert has also worked for Schroders, an asset management company, the Institute for Public Policy Research (IPPR) and the British Chambers of Commerce (BCC).
Peter Warburton is Director of Economic Perspectives, an international consultancy, and economist at Ruffer LLP, an asset manager. He was previously economic adviser in the equity research division of Chase Manhattan, having joined Robert Fleming in 1989 as Chief Economist.
Trevor Williams joined Lloyds Banking Group from the UK Civil Service where he worked as an economist. Trevor is currently the Chief Economist at Lloyds Bank, Commercial Banking.
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