Thursday, August 9, 2012

5 years on...and no gold medal for the UK economy!

Today marks the 5 year anniversary of the beginning of the financial crisis that gave rise to what most economists have labelled the "great recession".  It marks the date 5 years ago when France's Banque National Paribas first reported having trouble with its hedge fund because it had invested heavily in US subprime mortgages.  Economists at that time lined up to say that everything was alright, that the economy would be fine and even the Federal Reserve and Bank of England seemed unconcerned at what appeared to be a minor problem with a French banking subsidiary.  But what it presaged was not pretty, as we now know, and led to deep recessions on both sides of the Atlantic, and particularly in the US.

As today is my last day in the UK for a while, I thought it might also be a good time to reflect on what has happened to the economies on both sides of the Atlantic in the last 5 years, and what might happen from this point onwards. In one sense the US might have been expected to have had by far the worse economic situation given the fact that it was its mortgages that had caused the crisis. Indeed the US economy was in a bad way, but government spending was ramped up in the first Obama administration to offset the collapse in consumption expenditure and investment as it was by the Brown regime.  The first interesting point from the diagram below which shows real GDP for both the US and the UK is that in fact the UK had a deeper recession than the US.  This was because the UK was affected by the US downturn and the consequent downturn, but also had it's own housing bubble and banking crises to deal with as well.
Data source: Real GDP volume, chain index from UK ONS and US BEA
Graphic by blog author

After the UK general election in 2010, and the new liberal-conservative coalition government took up office, the new Chancellor (equivalent to a finance minister), Charles Osborne, declared that it was more important to balance the budget and embark upon cuts to budgets to instill confidence than continue the high level of government spending that the previous labour administration had been undertaking. This was supposed to lead to a revival in growth, but unforunately the Chancellor appears to have got things badly wrong.  The graphic on the left shows the level of real GDP using 2007 Q4 as the beginning of the recession in both the UK and the US ( - in fact the US recession might have started a quarter after this date). It is easy to see that: i) the UK doesn't appear to have done quite as much stimulus in 2009; then ii) in the first half of 2010 the UK appears to be closing the gap and then iii) once there is talk of the policy U-turn things abruptly change in the second half of 2010.  But it's the period from the middle of 2011 when the difference is most stark.  Clearly the US is continuing on a "recovery trajectory", ending up with higher levels of output than at the peak of the previous boom, whereas the UK now slides into a "double dip" recession with output now still nearly 6% below where it was at the end of 2007.

To my way of thinking this suggests that the US has been doing something right on the economic policy front, and as suggested recently in the UK by the Prime Minister David Cameron, UK economic policy needs to be changed.  The danger is that the current UK coalition will go in for a tweak rather than a radical re-think. Figures published today in the UK relating to the trade balance make things look even worse - exports of goods are down 8.4% year on year and even though imports are down slightly too, the trade balance is now the worst on record. So in other words, the UK can't grow from exports, and it's banks are still not lending, so investment is sluggish.  The only thing left is government spending.  Let's hope George Osborne is brave enough to do a U-turn or at least a radical re-think!

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