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Tigger’s hangover

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Tigger’s hangover

Phillip Hammond said he was feeling positively Tigger-like as he announced in his Spring Statement that the UK economy is at a turning point. Alas, the Office for Budget Responsibility didn’t share his enthusiasm. It sounded even more dismal than ever as it slightly increased its growth forecast this year while downgrading it for subsequent years. Having forecast a productivity uptick every year since 2010, now that we have finally had one the OBR has decided it is not going to last. Like the Bank of England, it believes that the economy is running close to its capacity and that any increase in productivity is likely to be slow.

 

The Resolution Foundation called this a “sugar rush outlook” with some short-term good news but a grim medium-term forecast. Matt Whittaker, the Resolution Foundation’s chief economist,  pointed out that per capita GDP growth has been well below its pre-crisis average since the recession. The OBR’s projections for the next 5 years are even worse, with annual growth below 1 per cent.

It’s easy to see from Matt’s chart that recent years don’t look like the postwar decades in which most of us spent much of our working lives and during which our assumptions about work, living standards and the economy were formed. We have been used to growth humming along at over 2 percent per year. Now its struggling to do even half of that. This time round, we haven’t seen the big boom years that used to follow recessions and make up for lost ground.

The suggestion that the next five years will see even slower per capita GDP growth than the last five isn’t something you would expect a politician to be Tiggerish about but perhaps it reflects the lowering of our expectations. After a decade of dismal economic news, growth forecasts that we would once have described as near stagnation are hailed as the road to sunlit uplands.

Something has clearly gone wrong with this recovery. It has barely been a recovery at all. In his report before the Spring Statement, Matt posted a chart looking at previous recessions and how long it took for the economy to recover from them. What is clear from this is that the downturns we complained about in the last half of the twentieth century were nowhere near as deep as the recent one or those that went before. They were shallow with rapid recoveries. That hasn’t happened this time.

Two years ago, Duncan Weldon tweeted a chart comparing average per capita GDP growth over 50 year periods and remarking that the early 21st century looks more like the late 19th than the late 20th. I have recreated the chart with 25 year periods and using the OBR projections to fill in the rest of this quarter century. I have given 2023 and 2024 the benefit of the doubt and assumed a miraculous post-Brexit boom of 2 percent per year. The result is that, if the OBR forecasts are right, the early 21st century will, indeed, look more the late 19th than the late 20th.

Sources: Bank of England, A millennium of macro economic data and Office for Budget Responsibility, Economic and fiscal outlook – March 2018

The trouble is, we have a state and public expectations that are based on late 20th century assumptions about growth. Until now, each generation has been richer than the last one and public service provision has expanded as we have come to expect more. Furthermore, this economic stagnation has come at the point when pressure on public spending is likely to increase. The Institute for Fiscal Studies estimates that demographic pressures alone will see growth in spending on state pensions, health and long term care outstrip economic growth. We will therefore have to pay more tax, borrow more or cut levels of public service provision.

 

This is bad news both for anti-austerians and for state-shrinkers. The government will have its work cut out just to keep public services running at their current level. Significant tax cuts would see parts of the state collapsing while any attempt to return spending on services to the 2010 level would mean even higher tax rises or borrowing. None of these options would be popular.

The big question here is whether this slowdown is simply the aftershock of a particularly severe recession or the dawning of a new era of much lower growth. Have we run out of inventions that will increase productivity? Was the rapid growth of the late 2oth century a one-off driven by wartime innovation and a demographic sweet spot? Has low public and private investment in the UK made things particularly bad here? Or was this just a really nasty downturn and a return to per capita GDP growth of over 2 percent is only a matter of time?

All these questions will be discussed on here at some point but whatever the story, if the OBR is even close to being right about its gloomy productivity and growth forecasts, the next few years are going to be particularly grim. Once the sugar rush is over, and data out yesterday suggest that it might start wearing off soon, then the hangover will kick in. Tigger might be left feeling a bit poorly.

(Tigger cartoon by the excellent Simon Heath.)

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