The myth of the economic recovery

Hugo Radice and John Weeks examine George Osborne’s claims of an austerity-driven return to growth

January 31, 2014
6 min read

MYTH: Any rise in growth means that economic stagnation is over

During the summer of 2013, the UK economy was reported to have registered modest growth, rather than the widely-expected ‘triple-dip’ recession. Chancellor George Osborne has hailed this as the first stage of recovery and a vindication of his austerity policies.

Does this mean that the crisis is over, and the recovery under way? If we measure the extent of ‘crisis’ only by the recorded figures for real gross domestic product (GDP) – the value of the production of goods and services, after allowing for price rises – then it does appear that the economy has turned the corner.

But the underlying reasons for the rise in GDP are more complicated than they appear on the surface. Recovery is often kick-started in a quite simple process through what used to be called an ‘inventory cycle’. Stocks of materials and parts, after being run down as production declines and expectations remain grim, reach a point where they start to run out. In the shops even the depressed sales start to deplete the shelves. A relatively modest restocking can stimulate output.

However, stock accumulation alone does no more than restore output towards its former level. Annual rates of growth of less than 1 per cent, as we have had for the past six months, are scarcely better than stagnation.

MYTH: The UK is doing better than comparable economies

Examining growth among the five largest developed countries (according to the Office for National Statistics’ Economic Review July 2013) shows this to be untrue. Since the depths plumbed in 2008, the US economy, suffering the least ‘fiscal consolidation’ of the five despite the best efforts of the Republicans, recovered most. It went from an eight percentage point fall after the beginning of 2008, to five percentage points above its previous peak GDP by the third quarter of 2013.

Next comes Germany, with a faster initial recovery but lower growth subsequently. Germany is the only major European country to enjoy growth at 2 per cent or higher – and while its government preaches fiscal austerity, it does not practice it (in 2007 public expenditure was 43 per cent of GDP, rising to 45 per cent in 2012). Japan is the third of the countries to recover its previous peak GDP.

These rather minimalist success stories are followed by France, which has ‘flat-lined’ since the beginning of 2011 and remains slightly below its peak GDP. Bringing up the rear is the Osborne recovery, with the UK economy even now stuck at 3 per cent below its level in the first quarter of 2008.

MYTH: The beginnings of a recovery mean it will inevitably continue and improve

The lack of growth in the eurozone and austerity at home severely constrain even the weak growth associated with an inventory cycle. To the eurozone mess we can add the great uncertainties in the wider world economy. The government talks about growth coming from the private sector, but investment by businesses remains depressed and shows little sign of recovery. While there have been announcements of major projects, for example in the motor industry, these have yet to move from the drawing board to construction. Ironically, it appears that in the first half of 2013, the only real growth resulted from a small increase in public spending (see below).

If the world economy picks up pace – still a big ‘if’ – then both export demand and investment will rise through 2014. The government is pinning its electoral hopes for 2015 on this happening, and current forecasts from the Office for Budget Responsibility support these hopes. But this is the same OBR that has become notorious for consistent over-optimism since it was set up in 2010. For example (see graph), its growth forecast for 2012 was 2.8 per cent back in June 2010, reduced to 2.5 per cent in March 2011, then a much lower 0.8 per cent in March 2012, and only 0.2 per cent by March 2013.

MYTH: The ‘recovery’ is the fruit of austerity

The overriding political question is whether George Osborne can take credit for what the media is calling recovery. When the coalition took office in May 2010, the chancellor immediately signalled his intention of focusing on the UK’s budget deficit and accumulated debts. He ignored the responsibility of the banks and financial markets for the crisis, and re-wrote the history of how the crisis was managed.

To any objective observer, Labour had not only avoided a total collapse of banking and finance in 2008-2009, but by the time of the election had succeeded in halting the crash in the real economy. In Osborne’s fantastic narrative, however, the huge budget deficits of 2009 and 2010 were cause rather than consequence. The blame for the entire crisis was laid at Labour’s door, and he has been very successful in maintaining this position.

As Michael Burke of the Socialist Economic Bulletin has pointed out (see bit.ly/sebaust), the main source of what little growth the economy has enjoyed in 2013 has been the result not of cuts, but the opposite: of public spending being higher than anticipated. This shows that the triple-dip has only been avoided by Osborne surreptitiously – or unwittingly – adopting the stimulus policy that his critics have consistently demanded.

MYTH: The economy turning the corner means that living standards are rising

This is the biggest ‘recovery’ myth of all. Most households have suffered significant cuts in their real incomes since the crisis began – often of 10–15 per cent since 2008 – and despite the uptick in GDP, incomes are not rising.

From the last quarter of 2007 until the second quarter of 2013, nominal (before inflation) private sector average earnings rose by only 11 per cent, and in the public sector only 14 per cent. When wage earnings hardly change, inflation takes its toll with a vengeance. In the same period, real wages – that is, once you take inflation into account – fell by an average of about 7 per cent in the private sector and 5 per cent in the public sector (Office for National Statistics, Labour Market Statistics, October 2013). Until real earnings start growing again, it won’t feel like a recovery for most people.