The second Great Depression

If today's projections are right, this will be the longest-lasting recession in a century.

Thankfully, the MPC did the right thing and kept rates on hold, in contrast to the ECB, which raised rates to 1.5 per cent. There is no evidence in either the UK or the euro area of a wage-price spiral emerging and inflation is expected to fall in the euro area, as the effects of the recent oil and commodity price increases drop out. Therefore, the ECB's move looks to be a classic policy error, as this will exacerbate the growth problems experienced by all countries.

As background, I looked at the latest data from Eurostat and plotted data on wages, inflation and changes in producer prices, which are presented below. What stands out is that there is no evidence of substantial increases in nominal hourly wage costs in any country; the highest increase is a paltry 3.8 per cent in France. Greece has seen a fall of 6.8 per cent. For the euro area, the average is 2.6 per cent and it is 2.1 per cent in the UK. The story is similar on inflation, which did not increase at all in the euro area over the past month and fell in five countries including Germany. Producer prices fell by 0.2 per cent in the euro area and in nine of the 17 euro area countries. What inflation? As I said, the ECB has made a major policy error, just as it did in July 2008 when it raised rates. This move to raise rates is madness, as it will lower growth in the euro area. Well done, MPC.

 

Another piece of evidence supporting the MPC's decision to sit tight was NIESR's latest forecast for the UK economy, published today. Although I think it should have done more quantitative easing (QE) as the economy is slowing -- but that is for another day.

Buried in the data is a potential bombshell for George "Slasher" Osborne. NIESR's monthly estimates of GDP suggest that output grew by only 0.1 per cent in the three months ending in June after growth of 0.5 per cent in the three months ending in May. In part, this was because the effects of one-off events in April have depressed the overall quarterly growth rate. However, even accounting for these factors, the underlying rate of growth NIESR believes is still likely to be weak. This compares with the OBR's forecast of 0.8 per cent.

Commenting on the forecast, Simon Kirby at NIESR argued that: "Economic growth in the UK continues to be subdued. In our April forecast, we expected growth to pick up in the second half of this year to around 0.5 per cent per quarter. We expect the domestic economy to contract throughout this year, leaving net exports as the major positive contributor to economic growth. There will continue to be much talk of continued economic growth over the coming months but it certainly won't feel like it to most people. As with any forecast, there is uncertainty and risk around the outlook. At present, the risks to growth are firmly balanced on the downside."

NIESR goes on to argue in its report that: "These figures do not provide a picture of economic growth that would support a tightening of monetary policy at this juncture." This is a not-too-subtle dig at NIESR's previous director Martin Weale, who left to join the MPC in August 2010 and has voted for rate increases over the past six meetings and presumably did so again today. His recent claim that raising rates now means that they won't have to be increased as much in the future is abject nonsense with no basis in economics or common sense.

The biggest news in the NIESR forecast is contained in the attached graph. This shows for the current recession and the 1970s, 1980s, 1990s, as well as the 1930s, the extent of the drop in output measured on the vertical axis and the length of time it takes for output to be restored. In the 1970s, recession output fell by 4 per cent and it took 36 months for output to get back to its starting level. In contrast, in the 1980s, output dropped 6 per cent and took 48 months to be restored. In the 1930s, output dropped by 6 per cent with a double-dip in the middle and also took 48 months to be restored.

GDP 

NIESR has kindly provided me with an updated version to the one it published, which also contains estimates of when the recession will be over, measured by the point at which output will reach the level it was at the start of the recession in 2008. That is the black diamond on the right of the graph. This suggests NIESR believes that this recession will be the longest-lasting in a century and output will not be restored for at least five years. This is based on NIESR's forecast for April but, given Simon Kirby's view that the risks are to the downside and the Q2 2011 forecast, then recovery could well take even longer than that. NIESR is, for example, forecasting growth of 0.5 per cent in both Q3 2010 and Q4 2010, which does look overly optimistic.

If NIESR is right, Osborne's policies will be responsible for the worst recession in a century -- and maybe it should be named the "Second Great Depression". This suggests an economic policy U-turn on the fiscal front must be in the offing. It also raises the prospect of the MPC doing more QE before the end of the year.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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Forget planning for no deal. The government isn't really planning for Brexit at all

The British government is simply not in a position to handle life after the EU.

No deal is better than a bad deal? That phrase has essentially vanished from Theresa May’s lips since the loss of her parliamentary majority in June, but it lives on in the minds of her boosters in the commentariat and the most committed parts of the Brexit press. In fact, they have a new meme: criticising the civil service and ministers who backed a Remain vote for “not preparing” for a no deal Brexit.

Leaving without a deal would mean, among other things, dropping out of the Open Skies agreement which allows British aeroplanes to fly to the United States and European Union. It would lead very quickly to food shortages and also mean that radioactive isotopes, used among other things for cancer treatment, wouldn’t be able to cross into the UK anymore. “Planning for no deal” actually means “making a deal”.  (Where the Brexit elite may have a point is that the consequences of no deal are sufficiently disruptive on both sides that the British government shouldn’t  worry too much about the two-year time frame set out in Article 50, as both sides have too big an incentive to always agree to extra time. I don’t think this is likely for political reasons but there is a good economic case for it.)

For the most part, you can’t really plan for no deal. There are however some things the government could prepare for. They could, for instance, start hiring additional staff for customs checks and investing in a bigger IT system to be able to handle the increased volume of work that would need to take place at the British border. It would need to begin issuing compulsory purchases to build new customs posts at ports, particularly along the 300-mile stretch of the Irish border – where Northern Ireland, outside the European Union, would immediately have a hard border with the Republic of Ireland, which would remain inside the bloc. But as Newsnight’s Christopher Cook details, the government is doing none of these things.

Now, in a way, you might say that this is a good decision on the government’s part. Frankly, these measures would only be about as useful as doing your seatbelt up before driving off the Grand Canyon. Buying up land and properties along the Irish border has the potential to cause political headaches that neither the British nor Irish governments need. However, as Cook notes, much of the government’s negotiating strategy seems to be based around convincing the EU27 that the United Kingdom might actually walk away without a deal, so not making even these inadequate plans makes a mockery of their own strategy. 

But the frothing about preparing for “no deal” ignores a far bigger problem: the government isn’t really preparing for any deal, and certainly not the one envisaged in May’s Lancaster House speech, where she set out the terms of Britain’s Brexit negotiations, or in her letter to the EU27 triggering Article 50. Just to reiterate: the government’s proposal is that the United Kingdom will leave both the single market and the customs union. Its regulations will no longer be set or enforced by the European Court of Justice or related bodies.

That means that, when Britain leaves the EU, it will need, at a minimum: to beef up the number of staff, the quality of its computer systems and the amount of physical space given over to customs checks and other assorted border work. It will need to hire its own food and standards inspectors to travel the globe checking the quality of products exported to the United Kingdom. It will need to increase the size of its own regulatory bodies.

The Foreign Office is doing some good and important work on preparing Britain’s re-entry into the World Trade Organisation as a nation with its own set of tariffs. But across the government, the level of preparation is simply not where it should be.

And all that’s assuming that May gets exactly what she wants. It’s not that the government isn’t preparing for no deal, or isn’t preparing for a bad deal. It can’t even be said to be preparing for what it believes is a great deal. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.