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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Rarely has it mattered so little if Manchester United won; rarely has it been so special they did

Team's Europa League victory offers chance for sorely needed celebration of a city's spirit.

Carlo Ancelotti, the Bayern Munich manager, memorably once said that football is “the most important of the least important things”, but he was only partly right. While it is absolutely the case that a bunch of people chasing around a field is insignificant, a bunch of people chasing around a field is not really what football is about.

At a football match can you set aside the strictures that govern real life and freely scream, shout and cuddle strangers. Football tracks life with such unfailing omnipresence, garnishing the mundane with regular doses of drama and suspense; football is amazing, and even when it isn’t there’s always the possibility that it’s about to be.

Football bestows primal paroxysms of intense, transcendent ecstasy, shared both with people who mean everything and people who mean nothing. Football carves out time for people it's important to see and delivers people it becomes important to see. Football is a structure with folklore, mythology, language and symbols; being part of football is being part of something big, special, and eternal. Football is the best thing in the world when things go well, and still the best thing in the world when they don’t. There is nothing remotely like it. Nothing.

Football is about community and identity, friends and family; football is about expression and abandon, laughter and song; football is about love and pride. Football is about all the beauty in the world.

And the world is a beautiful place, even though it doesn’t always seem that way – now especially. But in the horror of terror we’ve seen amazing kindness, uplifting unity and awesome dignity which is the absolute point of everything.

In Stockholm last night, 50,000 or so people gathered for a football match, trying to find a way of celebrating all of these things. Around town before the game the atmosphere was not as boisterous as usual, but in the ground the old conviction gradually returned. The PA played Bob Marley’s Three Little Birds, an Ajax staple with lyrics not entirely appropriate: there is plenty about which to worry, and for some every little thing is never going to be alright.

But somehow the sentiment felt right and the Mancunian contingent joined in with gusto, following it up with “We’ll never die,” – a song of defiance born from the ashes of the Munich air disaster and generally aired at the end of games, often when defeat is imminent. Last night it was needed from the outset, though this time its final line – “we’ll keep the red flag flying high, coz Man United will never die" – was not about a football team but a city, a spirit, and a way of life. 

Over the course of the night, every burst of song and even the minute's silence chorused with that theme: “Manchester, Manchester, Manchester”; “Manchester la la la”; “Oh Manchester is wonderful”. Sparse and simple words, layered and complex meanings.

The match itself was a curious affair. Rarely has it mattered so little whether or not United won; rarely has it been so special that they did. Manchester United do not represent or appeal to everyone in Manchester but they epitomise a similar brilliance to Manchester, brilliance which they take to the world. Brilliance like youthfulness, toughness, swagger and zest; brilliance which has been to the fore these last three days, despite it all.

Last night they drew upon their most prosaic aspects, outfighting and outrunning a willing but callow opponent to win the only trophy to have eluded them. They did not make things better, but they did bring happiness and positivity at a time when happiness and positivity needed to be brought; football is not “the most important of the least important things,” it is the least important of the most important things.

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