Past, Present and Future of GDP Growth in the UK.

This post was inspired by one by Mark Thomas: Does This Ease Your Worries?: US GDP from 1870-2008 where he shows that USA is getting back on trend for GDP growth. In the UK things look very different and so no, it doesn't ease my worries.

The Guardian conveniently provide a spread sheet of all the GDP figures from 1955--Q2 2012. Below is a plain graph of quarterly GDP figures with an exponential trend line courtesy of Excel.

What the graph shows however is that the trend overall is exponential growth - a shallow exponential curve, but with an R² value of 0.9917 the fit of the line is very good. There were ups and downs but basically we got back to trend until the global economic crisis. If we graph from 1955-1997 an exponential line is still the best fit, though the R² value is less at 0.9873.

Thatcher (1979-1990) inherited a recession and a period of below trend growth from Callaghan (1976-79) though the problem probably dates from earlier - witness the hiccough in 1973 that was followed by several years of stagnation. When Thatcher handed on to Major (1990-1997) things were picking up, but recession and below trend growth followed. And as Blair took over in 1997 growth had  returned to trend and growth was about 1% per quarter. It had been a turbulent few years since the early seventies and the collapse of the Gold Standard, the end of the Bretton Woods agreement, and the UK's Competition & Credit Control Act. Now things seemed to be looking up.

After 1997 growth in GDP began to accelerate, rising above trend at an increasing rate. However growth in this period is more accurately described as linear (R² = 0.9974) rather than exponential (R² = 0.9965). Clearly we got a long way ahead of the trend of the previous 43 years, further ahead than any previous period. This was Gordon Brown's economic miracle.

In fact the period of above trend growth (1997-2008) is the debt bubble caused by New Labour's deregulation of the finance industry. It caused a sustained period of GDP growth which Gordon Brown called "the end of boom and bust". It was part of a global phenomenon. In the USA they called it "the Great Moderation".

However in 2008 it all came tumbling down.

With GDP still shrinking we are unlikely to ever get back to the pre-crash trend. Having risen about 6% or £25 billion above the trend by 2008, today, four years later we are about 12% or £47 billion below trend (and remembering that these are quarterly figures). In pre-1997 terms we've lost 35 quarters or nearly 9 years of growth and counting.

I actually lean to the left in politics and I think the present Chancellor is a moron. His legacy will be the extension of the worst recession in modern times as the graph from the NYT shows. The UK has been mismanaged. The USA is about to head back down unfortunately and German is likely to be devastated by the breakup of the Euro if they don't act soon. That said our part in the global financial crisis was facilitated by the New Labour government with Gordon Brown as chancellor. He didn't end boom and bust, he increased it by an order of magnitude!

There are a couple of key differences between the USA and UK trends. In the UK we had no great perturbation of GDP in the Great Depression. For the UK the post-World War One recession was much worse. And whereas we see in the graph above the USA returning to growth, albeit possibly weakening, in the UK we started up and faltered. We're now so far off trend that we probably will never get back.

When economists say that this recession is different they do mean that it is both qualitatively and quantitatively different. What is happening now is unique in the post-War period and we're unlikely ever to make up those nine years. In previous recessions the economy has always bounced back and got back on track. Not this time.

Below is Japan's GDP Curve (from http://professorpinch.wordpress.com/).

This is going to be the shape our the UK's GDP curve now. Basically an extended period of stagnation at best. All those predictions of a return to growth? Just forget it. The game has changed. And the difference is levels of private debt.The USA and Germany are further ahead because they have half the level of private debt that the UK has.

In political terms I don't see anyone really getting to grips with this, so we'll just have to ride it out. A lots decade looks optimistic given our political leadership at present.

Japan has Seen it all Before, and We're Getting it Wrong

Nomura Research Institute's Richard Koo says that what the world is experiencing right now, a "balance sheet recession," is different from traditional recessions.

"This is no ordinary recession." 

Notes

"People were no longer maximising profits they were minimising debt. And even with zero interest rates people were paying down debt. And no economics text book or business school anywhere in the world has suggested that such a think should take place."

Corporate debt repayment occurred for 10 years. Equivalent to nett 6% of GDP for that period.

More debts than assets = bankrupt.  But can be bankrupt with cash-flow or without. Without cash-flow it's game over. With cash-flow the best thing to do is pay down debt. Best for all stakeholders: shares retain some value, banks get repaid, workers keep jobs. The right thing to do is to use cashflow to pay down det, and you'll eventually get back in business.

However when everyone does it the aggregate effect is that the economy shrinks. Even when interest rates are zero and people still don't borrow. Because if you are bankrupt "you are not going to borrow money at any interest rates; and no one is going to lend you money either!"

"The Great Depression in the US was exactly this pattern. US lost half of it's GDP in just 4 years... because everyone was paying down debt."

In Japan this continued for 10 years.

"In this type of situation monetary policy is largely dead in the water."

"The only thing the government can do is the opposite - borrow and spend."

"That's basically what we realised what was happening in Japan."

Govern stimulus improved things briefly, but then they cut the deficit and it crashed again--because the private sector was still deleveraging. And they repeated this cycle, for a full 15 years.

"And because this is not in the economic textbooks, because it's not supposed to happen, no one gave us the right direction, until we discovered it ourselves, that this is a different disease... fiscal stimulus was maintained we finally climbed out 2005, the whole thing took 15 years."