Thursday, March 14, 2013

Austerity bites

There's something quasi-mystical about the release of quarterly GDP figures. It's far more like augurs reading the omens in bird entrails than anything more scientific. Is 'it' working? Ooh, negative 0.3%! Quick, sacrifice a virgin!

This is partly why I'm cagey about great sweeping prognostications about how 'austerity' is destroying the UK economy. Because for every clarion call that everything is terrible, you can find something that is rather more nuanced. My inclination is that the UK is in a bit of a hole, largely because much of the growth and prosperity of the last decade turned out to be illusory - froth on the top of the cappuccino. That being so, I don't think any Chancellor would be doing much different. The real blows to the UK economy are external:
No sensible person thinks deficit reduction had no effect on growth, but if austerity was to blame for the shortfall in nominal and real growth, you would expect to see it reflected in weaker than expected private consumption. Spending cuts and tax rises reverberating around the economy would hit household incomes and spending more than expected. You would also expect stronger than expected exports as companies put more effort into sales abroad than in the austerity-ravaged domestic economy. This pattern is indeed evident in Spain.
But the UK does not follow the pattern. In 2012, nominal private consumption growth was exactly as the OBR forecast in December 2012, faster than the late-2011 prediction and almost spot on the estimate in the 2010 Autumn Statement. A similar pattern exists after adjusting for inflation. 
Instead of households tightening their belts more than expected, by far the most important cause of stagnation was the terrible export performance. Had foreign sales last year performed as the OBR forecast in late 2011, nominal gross domestic product would have been £13.6bn higher by the fourth quarter and the annual growth rate would have been 4.9 per cent not 1.3 per cent. In real terms, the export shortfall is the difference between growth of 2.7 per cent and the 0.3 per cent achieved. To sustain the “austerity is the main cause of weakness” argument, you therefore really need to convince people that UK austerity somehow caused more pain to French, German and Spanish households, and hence to UK exporters, than it did to UK households directly. It did not.
 The 'obvious' solution is to look to export more to the BRICs than to ageing, weakening Europe. Easier said than done that though.

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