Wednesday, 29 January 2014

Two different levels of economic mismanagement

By Michael Burke

The attempt by the Tory-led government to talk up recovery in the wake of the latest GDP data is entirely predictable. But the gulf between the propaganda and the reality of the British economy is now so wide that stagnation is being redesignated as recovery.

In the first estimate for the 4th quarter Britain’s GDP grew by 0.7%. This may be updated or revised at a later date. From this supporters of austerity make a series of outlandish or spurious claims about the ‘recovery’.

In fact the British economy has not actually recovered its previous peak before the recession, unlike even the exceptionally weak recoveries elsewhere in the advanced industrialised countries. The Reuters’ chart below shows the performance of those economies since the 1st quarter of 2008.


Fig. 1 Advanced Economies GDP In the Recession

 Far from being the strongest recoveries the British economy is one of the weaker of the industrialised economies. It has not yet entered a recovery phase, unlike the Germany, the US and Canada. Even now the British economy is weaker than the much-derided French economy.

The economy is no longer contracting. But pretending there is a recovery where none exists is a charade that could only fool the gullible. But there is another level of economic mismanagement altogether with regard to the effects of British economic policy in Ireland.

It has become customary to refer to the crisis countries in Europe as Portugal, Ireland, Greece and Spain. In fact Italy has been hit by a slump much deeper than any of these with the exception of Greece. But the direct and indirect effects of a crisis to destabilise the Italian financial markets, crucially the €2 trillion government bond market would threaten to bring down the entire European financial system.
The performance of the economy in the North of Ireland, where fiscal, monetary and other policies are set to by Westminster, is worse than any of the crisis countries except Greece.

The chart below was first produced by the author for this piece. It shows real Gross Value Added (GVA) for selected OECD economies plus real GVA for ‘Northern Ireland’ in the ONS regional accounts. GVA is the same as GDP except it removes the effects of taxes and subsidies on production. It is used to measure regional accounts as those effects are difficult to allocate regionally.


Fig. 2 Percentage Change in Real GVA in Selected OECD Economies & in Northern Ireland

In the chart there are effectively four broad groupings. Sweden, the US and Germany have been the most successful of these selected OECD economies. But even Sweden has increased its GVA in real terms by only 4.7% over a 5-year period. This might be regarded as crawling from the wreckage.

The next grouping includes France and the Euro Area where growth has been less than 1% in either direction around zero. This is effectively stagnation. As it probably encompasses the entire OECD the overall situation in the industrialised economies should be characterised as the Great Stagnation.

The third grouping includes the laggard economies of Portugal, Britain, Spain and the Republic of Ireland, where real GVA has each fallen by around 3% over the period. In effect these are economies where output is well below its prior peak and recovery remains elusive.

Finally there are economies where the crisis has been an outright disaster. Taking Italy alone, there have been sharper recessions in Western Europe in the post-World War II period. But none was so severe that there was still a 6.6% fall in output more than 5 years later. Greece has experienced the most severe slump of any OECD economy in the post-WWII period. The performance of the NI economy sits between these two. This is a qualitatively worse level of economic performance even than in Portugal, Britain, Spain and Ireland.

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