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

GETTY
Show Hide image

Erdogan’s purge was too big and too organised to be a mere reaction to the failed coup

There is a specific word for the melancholy of Istanbul. The city is suffering a mighty bout of something like hüzün at the moment. 

Even at the worst of times Istanbul is a beautiful city, and the Bosphorus is a remarkable stretch of sea. Turks get very irritated if you call it a river. They are right. The Bosphorus has a life and energy that a river could never equal. Spend five minutes watching the Bosphorus and you can understand why Orhan Pamuk, Turkey’s Nobel laureate for literature, became fixated by it as he grew up, tracking the movements of the ocean-going vessels, the warships and the freighters as they steamed between Asia and Europe.

I went to an Ottoman palace on the Asian side of the Bosphorus, waiting to interview the former prime minister Ahmet Davu­toglu. He was pushed out of office two months ago by President Recep Tayyip Erdogan when he appeared to be too wedded to the clauses in the Turkish constitution which say that the prime minister is the head of government and the president is a ceremonial head of state. Erdogan was happy with that when he was prime minister. But now he’s president, he wants to change the constitution. If Erdogan can win the vote in parliament he will, in effect, be rubber-stamping the reality he has created since he became president. In the days since the attempted coup, no one has had any doubt about who is the power in the land.

 

City of melancholy

The view from the Ottoman palace was magnificent. Beneath a luscious, pine-shaded garden an oil tanker plied its way towards the Black Sea. Small ferries dodged across the sea lanes. It was not, I hasten to add, Davutoglu’s private residence. It had just been borrowed, for the backdrop. But it reminded a Turkish friend of something she had heard once from the AKP, Erdogan’s ruling party: that they would not rest until they were living in the apartments with balconies and gardens overlooking the Bosphorus that had always been the preserve of the secular elite they wanted to replace.

Pamuk also writes about hüzün, the melancholy that afflicts the citizens of Istanbul. It comes, he says, from the city’s history and its decline, the foghorns on the Bosphorus, from tumbledown walls that have been ruins since the fall of the Byzantine empire, unemployed men in tea houses, covered women waiting for buses that never come, pelting rain and dark evenings: the city’s whole fabric and all the lives within it. “My starting point,” Pamuk wrote, “was the emotion that a child might feel while looking through a steamy window.”

Istanbul is suffering a mighty bout of something like hüzün at the moment. In Pamuk’s work the citizens of Istanbul take a perverse pride in hüzün. No one in Istanbul, or elsewhere in Turkey, can draw comfort from what is happening now. Erdogan’s opponents wonder what kind of future they can have in his Turkey. I think I sensed it, too, in the triumphalist crowds of Erdogan supporters that have been gathering day after day since the coup was defeated.

 

Down with the generals

Erdogan’s opponents are not downcast because the coup failed; a big reason why it did was that it had no public support. Turks know way too much about the authoritarian ways of military rule to want it back. The melancholy is because Erdogan is using the coup to entrench himself even more deeply in power. The purge looks too far-reaching, too organised and too big to have been a quick reaction to the attempt on his power. Instead it seems to be a plan that was waiting to be used.

Turkey is a deeply unhappy country. It is hard to imagine now, but when the Arab uprisings happened in 2011 it seemed to be a model for the Middle East. It had elections and an economy that worked and grew. When I asked Davutoglu around that time whether there would be a new Ottoman sphere of influence for the 21st century, he smiled modestly, denied any such ambition and went on to explain that the 2011 uprisings were the true succession to the Ottoman empire. A century of European, and then American, domination was ending. It had been a false start in Middle Eastern history. Now it was back on track. The people of the region were deciding their futures, and perhaps Turkey would have a role, almost like a big brother.

Turkey’s position – straddling east and west, facing Europe and Asia – is the key to its history and its future. It could be, should be, a rock of stability in a desperately un­stable part of the world. But it isn’t, and that is a problem for all of us.

 

Contagion of war

The coup did not come out of a clear sky. Turkey was in deep crisis before the attempt was made. Part of the problem has come from Erdogan’s divisive policies. He has led the AKP to successive election victories since it first won in 2002. But the policies of his governments have not been inclusive. As long as his supporters are happy, the president seems unconcerned about the resentment and opposition he is generating on the other side of politics.

Perhaps that was inevitable. His mission, as a political Islamist, was to change the country, to end the power of secular elites, including the army, which had been dominant since Mustafa Kemal Atatürk created modern Turkey after the collapse of the Ottoman empire. And there is also the influence of chaos and war in the Middle East. Turkey has borders with Iraq and Syria, and is deeply involved in their wars. The borders do not stop the contagion of violence. Hundreds of people have died in the past year in bomb attacks in Turkish cities, some carried out by the jihadists of so-called Islamic State, and some sent by Kurdish separatists working under the PKK.

It is a horrible mix. Erdogan might be able to deal with it better if he had used the attempted coup to try to unite Turkey. All the parliamentary parties condemned it. But instead, he has turned the power of the state against his opponents. More rough times lie ahead.

Jeremy Bowen is the BBC’s Middle East editor. He tweets @bowenbbc

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue