Last week the Office of National Statistics released its latest GDP bulletin, showing that Britain is now officially back in recession. Cue much wringing of hands, but I still find it very odd that we were apparently unable to see it coming. As I’ve mentioned before, when 78 economists were asked last year if a double-dip recession was likely, only one said yes.
I wrote two years ago that the recovery wasn’t as secure as we seemed to expect, that growth in 2011 was likely to be flat, and that we may be in for a longer, Japan-style plateau. Looking back at those posts, the situation is pretty much unchanged. Growth is still extremely unlikely. Why? Because our main avenues of growth are now closed.
Last year the financial services company Tullett Prebon released a rather radical report called Thinking the Unthinkable. It examines the composition of the British economy and where any future growth might come from. It’s not a pretty picture. Almost two fifths of the economy is made up of financial services, real estate and construction. The last decade’s growth in all three of those turned out to be a speculative bubble. The banks are now recapitalising, house prices are still too high, and nobody wants to risk construction projects in a downturn. So that’s 40% of the economy on ice.
Another fifth of the economy is public spending, which is in rapid retreat. The government’s austerity plans are only getting started, so that’s 20% of the economy ruled out. Retail accounts for another 10%, and that is slowing as wages fail to keep up with inflation. Take all this together, and 70% of the economy is more or less incapable of contributing to further growth.
So what have we got left? Well, perhaps we should make something and sell it to someone. Perhaps aware of the above, this was George Osborne’s original plan – a recovery ‘borne aloft on the march of the makers’. But even if our manufacturers find niches where they can compete with Chinese wages, and even if they can find export markets to sell to in a time of global uncertainty, manufacturing is only 10% of the economy. It is unlikely to be able offset the declines elsewhere. To borrow the ONS’s term, the outlook for Britain’s growth is therefore, ‘flattish’.
Today, David Cameron and Nick Clegg appear to be finally admitting that they’ve not understood the extent of the problem. “Here is the unvarnished truth” says the former. “The damage done by the crisis was greater than anyone thought.”
“Our economy has undergone a massive trauma,” echoes Mr Clegg, “the depth and nature of which we are only beginning to fully grasp.”
Indeed. Our politicians aren’t any better at predicting double-dip recessions than our economists.
So what should we do? Stop panicking – that would be a good start. We can’t assume that growth will return and that’s not the end of the world. We should be learning to live without it anyway, what with climate change, resource depletion and a rising global population.
Instead, we should be pursuing qualitative growth instead of quantitative – including greater equality, a healthier democracy, stronger communities, and more resilient ways of life.