This isn’t a uniquely French problem – EU nations of various political hues are in trouble because of a fixation on austerity
Today’s BBC headline fairly trumpets the news: “French economy returns to recession”. Funny how we Brits seem happy if our trans-Manche neighbours are doing a wee bit worse than we are. Especially if you can add that it is the fault of their government for being, well, a bit too left of centre.
True, the French have just entered double-dip recession, while we have just escaped. But in fact, in recent years the French and British economies have performed pretty much similarly in terms of GDP “growth” (or lack of).
The real European news today should, though, focus not so much on France, and certainly not alone, but on the dire state of the eurozone and broader EU economies. And this has no correlation with the formal political orientation of the government (centre-left, centre-right or whatever).
There is now a group of 10 EU states, not including France or the UK, who have experienced an annual fall in GDP for each of the past four quarters. This “Austerity A10 Club” includes the usual southern Europe list of Greece, Spain, Italy, Cyprus and Portugal. But it also includes two central European countries – the Czech Republic and Hungary – and the northern bloc of Belgium, Finland and the Netherlands – the land of Jeroen Dijsselbloem, Dutch finance minister and chair of the Eurogroup finance ministers, fresh from the Cyprus bailout “triumph”.
Italy’s GDP has now fallen 4.8% in just two years. Its annual GDP is back to the level of the year 2000. Greece has lost a staggering 31% of GDP, compared with its peak in 2008. These are catastrophic declines that have greatly worsened in the past two years.
And even Germany and Poland – which until recently have done reasonably well – each managed last-quarter growth of just 0.1%.
The problem that unites of all of these countries and the UK is not the political colour of the government but the macroeconomic policy that has been followed. It is particularly harsh for the eurozone countries which cannot rely on a central bank to ward off the bond vigilantes, and who are subject to the Bundesbank’s destructive (and increasingly self-destructive) policies of focusing on the risk of inflation just as the eurozone slides into deflation.
The deficit and debt/GDP ratio fetishes that unite the UK government, Ukip, the European Central Bank and the European commission are part of the economics of the poorhouse, where co-ordinated austerity is seen as a “solution”, even while unemployment reaches mass levels unknown in Europe’s modern history. Let’s remember why Keynes wrote his General Theory of Employment, Interest and Money: in sum, employment must come first, the rest follows.
The problem for social democratic parties across Europe is that – scared in many cases of being viewed as anti-European – they have accepted the iron logic of the Bundesbank’s dogma, and are unable to offer an alternative of generating internal European demand.
This means hitting hardest the working class and other not-so-well-off voters in their countries, who turn either inwards on themselves (depression, suicide etc) or to other political forces, mainly rightwing populism.
The only solution for Europe’s social democratic parties is to say: no, time to change course. To make alliances with Greens and other new democratic forces. The European economic orthodoxy has to be challenged in unison by the centre-left parties if they are to survive and stand for any positive policies.
The EU from the outset was a balance between the interests of capital (common market) and labour (social protection). While that balance was maintained, most people across Europe were content with the EU, for all its faults. But the Troika (the ECB, the EC and the International Monetary Fund) is destroying that balance, leaving the EU simply as a neoliberal vehicle.
ONS number crunchers now argue the three quarters of declining GDP in 2011/2012 may not have made a double dip
When is a recession not a recession? According to the Office for National Statistics, when the economy is “broadly flat”. Fresh from announcing that Britain has escaped a triple dip, the nit-picking number-crunchers are now arguing that the three quarters of declining GDP in late 2011 and early 2012 we’ve all come affectionately to know as the “double dip”, should perhaps not qualify as a recession at all.
In a new Economic Review, the ONS points out that there’s no universally accepted definition of recession – in the US, for example, a panel of top academics, the National Bureau for Economic Research’s business-cycle dating committee makes a judgment about when a recession has taken place, taking into account other factors such as unemployment, as well as output.
In Britain, two consecutive quarters of declining output is the usual definition of recession. But the ONS points out that the last quarter of 2011 and the first three months of last year saw marginal declines in GDP of just 0.1%; and the subsequent 0.4% decline from April to June was exaggerated by the extra bank holiday for the Queen’s jubilee.
“Rather than relying on small changes in quarterly growth rates to justify calling a recession, we should consider the growth rate of the economy over a longer period”, the ONS argues.
This looks suspiciously like a pre-emptive attempt to fend off a wave of statto-bashing – a favourite sport in the City – if, as many analysts expect, the double dip is eventually revised away in a later set of statistical estimates.
But before George Osborne starts re-writing his legacy – scratching out the bit where he drove Britain back into recession – he should read the rest of the ONS’s musings. Recession or no recession, they conclude, the economy is flat on its back, or as they prefer it, “broadly flat”.
Worse, in electioneering terms, as the Tories start to look towards 2015, even if the headline-grabbing double dip is wiped away, the ONS says the underlying figures show the economy moving through “three distinct phases” since 2008.
There was a deep recession, lasting until mid-2009, followed by five quarters of “steady recovery”; but from the third quarter of 2010, shortly after the coalition took power, output has been “flat or at best gently rising”.
With a plethora of charts, the report hammers home the point that this has been a weaker recovery than any seen in the 20th century. Worse still, for politicians hoping for a return of the feelgood factor, the 3.8% rise in the population since 2010 has meant that in GDP-per-capita terms, the non-recovery looks even more non-existent. Output-per-head is 12% lower than at this stage after the onset of the painful 1970s recession.
It may be fanciful for the ONS to hope that economists – let alone journalists – will moderate their language, and soften the long-held, hard and fast definition of “recession”; but this new analysis does suggest there’s nothing standard about the trauma the British economy has experienced in the past five years – and as yet, no end in sight.
The chancellor, George Osborne, says Thursday’s GDP figures indicate the UK economy is recovering
Gross domestic product is the economic output of Britain. See how it has changed over time
• Get the data
• Interactive chart: How does this recession compare?
• Chart: GDP change since 2008
We’ve just escaped a triple-dip recession: GDP for the last three months rose by 0.3%. If the economy had shrunks again in the first quarter of this year, that would have plunged the UK into its third recession in the past five years, an unprecedented triple-dip.
As the ONS explains, it’s hardly dynamic growth:
They blamed the weather for a low rate of growth: “The strongest evidence was that it reduced retail output in January and March 2013 but boosted demand for electricity and gas in February and March, which increased output in the energy supply industries.”GDP was 0.4% higher in Q1 2013 than in Q3 2011 and therefore has been broadly flat over the last 18 months.”
The figures above show how recessions compare – thanks to the National Institute of Economic and Social Research for the data. The economic recovery since the crash of 2008 is the slowest since 1921.
The data we have gathered shows percentage change in GDP going back to 1955 by quarter.
This shows what’s happened to GDP since the peak of 2008.
he spreadsheet to download shows GDP in cash, ie what it was that year not adjusted for inflation, total inflation-adjusted figures and per capita inflation adjusted figures.
And this is how it compares. While we are below the US and Japan – the UK is doing better than the rest of Europe.
The ONS explains today’s data as follows:
• By far the largest contribution to Q1 2013 GDP growth came from services; these industries increased by 0.6% contributing 0.47 percentage points (pp) to the 0.3% increase in GDP.
• There was also a small upward contribution (0.03pp) from production; these industries rose by 0.2%, largely due to mining & quarrying, which increased by 3.2% following a weak Q4 2012 when extended maintenance in the North Sea reduced output.
• These upward contributions were partially offset by construction; these industries fell by 2.5%, reducing GDP growth by 0.17pp.
• Before the sharp fall in output in 2008 and 2009 the economy peaked in Q1 2008; the lowest level was in Q2 2009. GDP fell 6.3% from peak to trough. In Q1 2013 GDP was estimated to be 2.6% below the peak in Q1 2008.
You can find out who gets access to this data early too by clicking here.
Look at the chart and it’s striking how dramatic the recessions were of the past – but how quickly they were over.
This is just an estimate: we get one each month for the next two and it can be revised up or down. The ONS explains how its dataset is not complete yet:
At this stage it is estimated that the information content of this estimate is around 44% of the total required for the final output based estimate. This includes good information for the first two months of the quarter, with an estimate for the third month which takes account of early returns to the monthly business survey of 44,000 businesses (which typically has a response rate of between 30-50% at this point in time). The estimate is therefore subject to revisions as more data becomes available, but between the preliminary and third estimates of GDP, revisions are typically small (around 0.1 to 0.2 percentage points), with the frequency of upward and downward revisions broadly equal.
As several of our posters below have pointed out, there’s more to life than GDP – but here are the latest GDP figures from the ONS for you to explore.
Download the full data
• SOURCE: ONS
World government data
Development and aid data
Can you do something with this data?
Paul Owen with live coverage as the Office for National Statistics reveals whether or not Britain is in a triple-dip recession
The theories on which the chancellor based his cuts policies have been shown to be based on an embarrassing mistake
It was a mistake in a spreadsheet that could have been easily overlooked: a few rows left out of an equation to average the values in a column.
The spreadsheet was used to draw the conclusion of an influential 2010 economics paper: that public debt of more than 90% of GDP slows down growth. This conclusion was later cited by the International Monetary Fund and the UK Treasury to justify programmes of austerity that have arguably led to riots, poverty and lost jobs.
Now the mistake in the spreadsheet has been uncovered – and the researchers who wrote the paper, Carmen Reinhart and Kenneth Rogoff, have admitted it was wrong.
The correction is substantial: the paper said that countries with 90% debt ratios see their economies shrink by 0.1%. Instead, it should have found that they grow by 2.2% – less than those with lower debt ratios, but not a spiralling collapse. Yet cutting public spending to avoid that contraction has become a lynchpin of both George Osborne’s and the IMF’s policies.
For Reinhart and Rogoff, who have a huge reputation in the field – both worked at the IMF, Reinhart is a former chief economist at Bear Stearns, and Rogoff worked at the Federal Reserve – the discovery has been hugely embarrassing. “It is sobering that such an error slipped into one of our papers,” they said in a statement.
The focus now is on whether the economic theory that had seemed to bolster austerity programmes will follow them into full reverse — and whether politicians and bankers will stick with programmes that are having dubious effect.
“Cutting the debt was the be-all and end-all for Osborne,” said Danny Blanchflower, a former member of the monetary policy committee at the Bank of England and now professor of economics at Dartmouth College in New Hampshire. “This is the foundations of that house being ripped away. Reinhart-Rogoff [as the paper was known] was the fundamental building block.”
Jonathan Portes, former chief economist at the Department for Work and Pensions and now director of the National Institute of Economic and Social Research, said: “This was an exceptionally influential and widely cited paper, and George Osborne has repeatedly made clear that Ken Rogoff, who he has frequently met, has been very influential on his thinking.”
Rogoff, a former chief economist at the IMF, is regularly canvassed by the chancellor as he seeks a robust defence for the UK’s slow recovery. He and Reinhart are the only economists consistently quoted by the chancellor in his speeches. Portes points to Osborne’s speech at the prestigious Mais lecture in February 2010, not long before he took office, at which the chancellor said: “Perhaps the most significant contribution to our understanding of the origins of the crisis has been made by professor Ken Rogoff, former chief economist at the IMF, and his co-author, Carmen Reinhart.” The chancellor then quoted the finding from their paper: “The latest research suggests that once debt reaches more than about 90% of GDP, the risks of a large negative impact on long-term growth become highly significant.”
This week Rogoff and Reinhart are fighting to salvage their reputations from the humiliating experience of having their paper torn to shreds. The paper, which they continue to defend despite admitting mistakes, came under scrutiny after the pair released the spreadsheet calculations underpinning their model to rival academics at Massachusetts University. The error was discovered by Thomas Herndon, a PhD economics student at Massachusetts.
The Massachusetts economists who led the attack on the 2010 paper questioned why their Harvard rivals used a generic Excel spreadsheet to carry out ground-breaking research. According to the European Spreadsheet Risk Group, spreadsheets were behind the collapse of the Jamaican banking system in the late 1990s, and their use was key in the development of collateralised debt obligations – the financial instruments that promised sub-prime mortgages could somehow become AAA-rated investments.
Labour said the chancellor’s plans had lost credibility. “We warned that rapid fiscal tightening when the global economy is weak risked backfiring and that’s what has happened. The idea of expansionary fiscal contraction has been exposed as total nonsense,” said Ed Balls, the shadow chancellor.
In the US, Nobel prizewinning economist Paul Krugman said the unravelling of Rogoff and Reinhart’s paper was a hammer blow to Republicans who had campaigned for spending cuts to reduce Washington’s 100% debt-to-GDP level.
Rogoff defended his work, saying that the errors failed to undermine the general message. He said: “Carmen and I have consistently been strongly in favour of major restructuring as a centrepiece of the solution for eurozone periphery public debt and senior bank debt. We believe that the current plan of relying on a mix of austerity and optimistic growth forecasts is riskier than restructuring would be.”
An aide to the chancellor said the result “remains robust”. He added: “The suggestion that the case for dealing with fiscal deficits and debt rests on one paper is patently absurd. It remains the case that the majority of economists still back the government’s strategy.”
Freezing weather has hit sectors, but whether growth is negative or 0.2%, the underlying picture is of an economy struggling
Will it or won’t it? Is the UK about to experience its first ever triple dip or will the next set of growth figures be the point at which the economy finally turns the corner? One thing is for sure. Every piece of data published in the few remaining weeks before the release of the flash estimate of GDP at the end of April will be pored over for triple-dip clues.
Two things are worth mentioning from the outset. The first is that the political impact of a weak number will be greater than its economic significance. It doesn’t matter that much whether growth was plus or minus 0.2% in the first three months of 2013; the underlying picture is of an economy struggling to get out of first gear.
The second is that the initial estimates of GDP from the Office for National Statistics are tentative, based as they are on incomplete evidence which can be substantially revised later.
It is worth noting, in this respect, that Britain’s double-dip recession in late 2011 and early 2012 now looks extremely shallow, with output declining by 0.1% in two of the three quarters of negative growth. It is possible the double dip will eventually be revised away completely.
Still, none of that will count for much if the ONS reports on 24 April that the economy did suffer a second consecutive quarter of falling GDP between January and March this year.
So what is the outlook? The data so far is both scanty and mixed. Output of both the industrial production and construction sectors was down in January. But there was better news for George Osborne from Thursday’s report from the service sector, with 0.3% growth between December 2012 and January 2013. That’s a relatively modest increase, but given that services account for 77% of GDP, the pickup helps to offset the bigger falls in industry and on building sites. What’s more, the performance of the service sector would almost certainly have been stronger had it not been for the poor weather in the second half of January.
Evidence from the high street suggests that there was a bounce back in spending in February once the thaw set in, and the Office for Budget Responsibility believes the economy will expand by 0.1% in the first quarter. Crucially, though, that forecast was made before it became clear that the UK would have its coldest March for 50 years, and before Cyprus provided the latest twist to the eurozone saga.
Despite some signs that the economy is strengthening slightly, a triple dip remains a very real possibility.
Abolition of air passenger duty would create around 60,000 jobs according to British Airways commissioned report
UK-based airlines have launched a renewed attack on air passenger duty with a report that claims the UK economy would be boosted by £16bn a year if the tax was scrapped.
Commissioned by four British airlines including British Airways, the report by PricewaterhouseCoopers claims that the abolition of the tax would create almost 60,000 extra jobs in the UK in the long term. It adds that scrapping APD would pay for itself by increasing revenues from other sources such as income tax and VAT.
The boost to GDP would come from three main sources, the study says: extra investment by airlines; more tourist visits to the UK; and a boost for domestic businesses from more business travel.
PwC said: “Abolishing APD has the potential to reduce the cost of flying, making it cheaper for businesses to maintain relationships with overseas customers. In this sense APD could be regarded as a tax on exports.”
It added: “APD is at least as damaging to the UK economy, and probably more so, than corporation tax or fuel duty.”
Introduced in 1994, APD has since January 2007 increased by up to 260% for short-haul flights and up to 360% for long-haul flights. APD costs £13 for a short-haul flight and up to £92 for a long-haul journey.
Office for Budget Responsibility expects a contraction in GDP of 0.1% this year and growth of 1.2% in 2013
George Osborne was forced to admit that the grim outlook for economic growth means he has broken one of his two self-imposed fiscal rules and the Tories will go to the polls in 2015 promising another three years of austerity.
Back in 2010, when the brand new Office for Budget Responsibility published its first assessment of the economic outlook, it was expecting Britain’s recovery to be in full bloom by now. Growth in 2012 was forecast to be a healthy 2.8% this year, rising to 2.9% in 2013.
But ever since that first outing, the OBR’s forecasts have repeatedly been pummelled by reality, and on Wednesday it announced that it now expects an outright contraction in GDP of 0.1% this year, and anaemic growth of just 1.2% in 2013.
According to its chairman, Robert Chote, the downgrade would have pushed the public finances £105bn off course over the next five years without the series of one-off factors that flattered Osborne’s figures.
The OBR’s latest forecasts fell more closely into line with the bleak City consensus. In his speech to the House, Osborne insisted Britain was “on the right track;” but said that there were “no quick fixes,” for an economy still working through the after-effects of the deepest recession in a century, and what he called the “decade of debt”.
According to the OBR, the weaker-than-expected performance of the economy reflected three factors:
• Consumer spending was lower in real terms after high inflation devalued shoppers’ spending power.
• Business investment failed to recover as expected as a result of bank loan rationing and is likely to stay depressed compared to the OBR’s original forecasts.
• Net trade is weaker than expected after British firms failed to capitalise on the lower pound to improve sales abroad. The OBR said the euro crisis, slower growth in China and the economically unstable situation in the US were to blame.
Osborne seized on the OBR’s assessment that the government’s austerity programme was not to blame for the deterioration in the economic outlook.
Chote’s view contradicts the International Monetary Fund, which warned governments to restrain spending cuts after it calculated that every pound cut from government spending reduced output by an average £1.30.
Judged by the two rules he set himself when the coalition came to power, the OBR scored Osborne one out of two. It said he looks set to meet his first rule, the “fiscal mandate” – to balance the budget over the coming five years, adjusted for the economic cycle.
But Chote said the government will take a year longer before it can reduce the UK’s debt as a proportion of GDP – busting Osborne’s second rule, that public debt as a share of GDP should be falling by 2015-16.
He said: “We now expect debt to rise in that year, to a peak of just under 80% of GDP, and then to start falling in 2016–17. So we believe that it is more likely than not that the government will miss the supplementary target.”
Shadow chancellor Ed Balls was thrown off balance by the fact that despite the double-dip recession, the deficit will actually be £11.5bn lower than previously forecast this year, adding £108.5bn to the public debt, instead of £120bn – a fact the chancellor gleefully pointed out.
The total was flattered by a series of one-off factors, including the expected £3.5bn revenue from the sale of the 4G phone network; the £11.5bn windfall from the Bank of England’s Asset Purchase Facility; and the Royal Mail’s pension fund being taken on to the government’s books.
Danny Gabay, of City consultancy Fathom, said: “We do feel uneasy about a system where internalising the Royal Mail pension deficit, selling some ‘air’ (otherwise known as 4G licences), and seizing the proceeds of APF gilt purchases can apparently lead to a material improvement in the public finances.”
Even with this extra helping hand, though, Osborne was only able to hit his first target by extending austerity for another year.
In 2010, he had expected to be able to stop swinging the axe before the end of the parliament, in 2015. He is now promising cutbacks until 2017-18, with much of the pain falling on benefit claimants, who will see their payments increase by 1% a year, instead of being uprated in line with inflation – a measure that will bring in £3.7bn a year, but squeeze the living standards of poor families.
Crucially, the OBR has also attributed most of the downturn in the economy since its last outing in March to a short-term, cyclical downturn, instead of a more permanent, structural crisis in the economy.
Since his “fiscal mandate” is adjusted for the economic cycle, if Britain is still stuck in a slump, Osborne can run a deep deficit without busting the rule.
Economists outside the OBR were puzzled at precisely how its latest forecasts had been arrived at. Jonathan Portes, director of the national institute for economic and social research, said: “They’ve just thrown out their previous approach and made up a number instead.” The OBR now expects the cyclically-adjusted deficit to be 0.9% in 2017-18; but in cash terms the Treasury will still be borrowing £31bn.
Some City analysts claimed the OBR’s growth forecasts still looked too upbeat: Chris Williamson, of Markit, said they contained, “some eye-catching numbers which still have an air of undue optimism about them”, highlighting its prediction that the modest recovery next year would be partly driven by a 5% rise in business investment.
Chancellor says the Office for Budget Responsibility now forecasts a contraction of 0.1% in 2012 but insists that the ‘British economy is healing’
George Osborne has insisted the British economy is “on track” – despite warning that he now plans to extend austerity measures until 2017-18, deep into the next parliament, as weaker-than-expected growth hits the public finances.
Delivering his autumn statement to the House of Commons on Wednesday, the chancellor insisted there were “no quick fixes” for the British economy.
He said the Office for Budget Responsibility was now predicting a contraction of 0.1% in 2012, down from the growth of 0.8% it forecast alongside the chancellor’s March budget.
“It’s taking time but the British economy is healing,” he told MPs. The independent forecasting body also slashed its forecast for GDP growth next year to 1.2%, down from 2%.
Despite the weaker-than-expected outlook, however, the chancellor reaffirmed his determination to press ahead with the coalition’s deficit-cutting strategy, insisting that, “turning back now would be a disaster”.
He said he was wrestling with the consequences of the “decade of debt” at home, as well as the eurozone crisis, and fears of a “fiscal cliff” in the US.
Flat-lining growth has depressed tax revenues, hitting the public finances hard. Osborne said the OBR has judged that he now looks likely to miss his promise that the national debt would be falling by 2015-16. Instead, the OBR believes debt as a share of GDP will now peak at 79.9% in 2015-16, instead of 76.3%, a year earlier, as it predicted in March.
However, the OBR’s assessment does show the government meeting Osborne’s other target, the so-called “fiscal mandate”, of balancing the budget over the next five years. The deficit is expected to fall as a share of GDP over the coming five years, from 6.1% this year, to 1.6% in 2017-18. It was previously expected to be just 1.1% by 2016-17.
“The deficit is still far too high for comfort; we cannot relax our efforts … the road is hard, but we cannot relax our efforts”, he told MPs.
“This government has shown that it is possible to restore sanity to the public finances, while improving the quality of the public services.”
The shadow chancellor, Ed Balls, has blamed the government’s spending cuts for pushing Britain into a double-dip recession by sucking demand out of the economy.
But Osborne said the OBR’s assessment, which will be published in full later on Wednesday, blamed the depth of the 2008-09 recesssion; the slowdown overseas; and the fragile state of the banking sector for the weaker-than-expected growth performance of the economy.
The chancellor set up the independent OBR to ensure that the Treasury could no longer present deliberately optimistic growth forecasts to make the public finances add up.
However, the OBR has repeatedly been forced to revise down its projections, as recession in the eurozone and slowing demand from emerging economies has hit growth. When Osborne delivered his first, “emergency” budget in June 2010, the OBR was expecting growth to be 2.8% this year, and 2.9% in 2013.