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No boom, this is a recovery – but not as we know it

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No boom, this is a recovery - but not as we know it Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission. One of the big questions for people like me is whether the economic measures we write about, like gross domestic product (GDP), actually relate to the experience of people and businesses. One of the quotes that has stayed from the Brexit referendum is the one in which an expert is in Newcastle explaining the negative impact of leaving that EU on GDP and a woman in the audience heckles: “That’s your bloody GDP. Not ours.” It would be nice if she were not anonymous, because she deserves to be up there alongside Brenda from Bristol, the

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No boom, this is a recovery - but not as we know it

Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.

One of the big questions for people like me is whether the economic measures we write about, like gross domestic product (GDP), actually relate to the experience of people and businesses. One of the quotes that has stayed from the Brexit referendum is the one in which an expert is in Newcastle explaining the negative impact of leaving that EU on GDP and a woman in the audience heckles: “That’s your bloody GDP. Not ours.” It would be nice if she were not anonymous, because she deserves to be up there alongside Brenda from Bristol, the lady who bemoaned the frequency of UK general elections.

You will know that we now have a new reading for GDP, which showed that it is getting closer to pre-pandemic levels. We are not quite there yet but should be relatively soon. That will make the recession and recovery as a result of the pandemic both the deepest and the shortest in the modern era. It normally takes three years to get back to where the economy was before the recession, and after the financial crisis of 2008-9 it took five.

I have explained before that there are different tests on regaining pre-pandemic levels depending on whether monthly or quarterly GDP figures are used. The monthly figures for September showed that GDP is now only 0.6 per cent below where it was in February 2020. That, coincidentally, followed a 0.6 per cent rise in September.

On a quarterly basis, after expanding by 1.3 per cent in the third quarter, down from 5.5 per cent in the second, GDP was 2.1 per cent below where it was in the final quarter of 2019. That is a bigger shortfall than most other big economies, reflecting the UK’s bigger slump last year.

In both cases, however, GDP should be back to pre-pandemic levels at or around the two-year mark; sooner in the case of the monthly figures, maybe slightly longer on a quarterly basis. When we look back on this period in the data, it will shine out as a dramatic V-shaped recession and recovery, of the kind I used to talk about in the darker days of the pandemic. It has been driven by restrictions and voluntary changes in behaviour and the easing of them. It was an abnormal recession, driven by a health emergency, and it is an unusual recovery.

That is why, despite the views of Nora from Newcastle – until we have a proper name – the GDP figures tell a story that probably fits the experience of many people and businesses. The story not to be taken from this is that we are experiencing a boom that will put the Barber boom of 1973 in the shade.

That is because this year’s elevated growth rate of around 7 per cent, is largely a product of comparisons with weak data a year earlier. So, after falling in the first quarter, GDP in the second quarter was up by 23.6 per cent on a year earlier, followed by a 6.6 per cent increase in the third. With numbers like this it is not hard to get a big annual growth figure, and for it not to read as if it were a boom. Similarly, next year’s growth will be boosted by comparisons with this year’s weakish first quarter.

A better picture is provided by the quarterly and monthly profiles for GDP. Growth of 1.3 per cent in the third quarter was weaker than expected. September on its own showed a 0.6 per cent rise, after the economy essentially stalled in July and August, though September was boosted by a big increase in “human health activities”, apparently because of a big increase in face-to-face appointments at GP surgeries. Plenty of things make up GDP.

The picture that many people are familiar with is there within the details.

Consumers are not very confident and consumer spending in the third quarter was 4.4 per cent down on pre-pandemic levels. Households increased their spending in the third quarter on eating out and hotels, and on transport (partly due to the petrol panic) but reduced it on quite a lot of other things, including clothing and footwear. Consumer-facing services have a way to go, more than 5 per cent, to get back to where they were before the virus struck.

There is also a more familiar picture, given all the headlines about shortages in recent weeks, when it comes to industry. Manufacturing output in September was marginally lower than in November last year, before the first ever Covid vaccination, and industry has been flatlining, in aggregate, for many months. Chip shortages have been a factor bearing down on vehicle production, but other sectors are also finding it hard to make progress through the headwinds.

Business investment, meanwhile, despite the massive encouragement provided by the chancellor’s “super deduction” tax incentive, edged up by only 0.4 per cent in the third quarter.

There are three other reasons why, while we should celebrate the fact that Covid did not send us into a new great depression, the GDP figures are a cause for only muted comfort.

The first is that the recovery is bringing pain with it in the form of higher inflation, the central reason for weak business and consumer confidence, and a story that is going to stay with us for some time.

The second is that while returning to where we were before the pandemic might seem like paradise as far as normal life is concerned, it was no economic nirvana. We had a slow-growing economy in which the damage from Brexit was already apparent. The government has appeared ready to add to that damage and trigger a trade war with the EU, because it is unhappy with the deal it negotiated, though I suspect after Downing Street’s recent blunders, the prime minister will be keen to avoid that.

Finally, of course, we should properly compare where we are now, not with where we were, but where we should have been. If the pandemic had not occurred, the economy would have continued growing. Not strongly, but growing nonetheless. Consensus forecasts in February 2020 had the economy growing by 1.1 per cent last year and 1.4 per cent this year, before the pandemic struck. If we take those as our guide, the economy is still 5 per cent or so down on where it might have been. Some of that shortfall, the scarring, will remain. It’s a recovery, but not as we know it.

No boom, this is a recovery - but not as we know it
David Smith
David Smith is economics editor of The Sunday Times. His website is http://economicsuk.com . His latest book is Something Will Turn Up.

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