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

Don't blame Brexit on working-class anger - it's more worrying than that

White voters who identified as "English not British" backed Brexit.

For those of us who believe that the referendum result in favour of Brexit is an unmitigated disaster, the nominations for culprits are open. Former Liberal Democrat leader Nick Clegg made a compelling argument in the Financial Times that the blame lies squarely with Cameron and Osborne.

Clegg, who has first-hand experience of Tory duplicity, is scarcely a neutral observer. But that does not make him wrong. No doubt the PM and the Chancellor are the proximate cause, and should be held accountable by their parliamentary constituents, their party, and by the country as a whole - or what’s left of it if Scotland goes its own way.

Yet journalists and historians alike would do well to probe deeper causes of the referendum result. One obvious culprit is the British press, who, at best, failed to scrutinise the Leave Campaign’s claims and at worst actively abetted them. The New York Times has suggested that using the EU as a punching bag has helped sell papers (or at least generate clicks) in what is probably the most challenging climate for traditional journalism in two centuries.  Boris Johnson, it seems, is irresistible clickbait for the fourth estate. And as Nick Cohen has observed on Saturday, Johnson and Gove, both politician-journalists, have elevated mendacity in politics from an occasional vice to a lifestyle choice.

The search for deeper causes of the Brexit vote, however, cannot end with the press. A different electorate could have taken a different view, as they did in Scotland, which voted 2-1 to Remain.  What was the magic sauce?

Too many commentators, especially those on the Left, have blamed working-class anger. It’s all about social class, apparently. Lisa Mckenzie nearly predicted the result on that basis. Others use it simply to criticise Tory austerity politics. Blaming class can be woven into another favourite narrative - this is about lack of educational attainment. Anyone who has lived in Britain for any period of time knows the class system, the town-and-country divide, and intergenerational wealth disparities as important features of British life. 

Another favourite culprit is racism, as the Washington Post wondered on SaturdayOthers had the same thought, and racist attacks are on the rise. Given Nigel Farage’s antics in the weeks before the election, none of this is surprising. Amidst such scary stuff, many have tried to emphasise that most Brexit voters are not racist, but rather disillusioned with the rule of metropolitan elites. Douglas Carswell is one proponent of this argument, but he’s not alone. The Economist, in an effort to avoid talking about race, asserts that this result was about age, region and class.

Still, this kind of analysis is at best naïve and at worst disingenuous. 

As Lord Ashcroft’s polls suggest, it is only the white working class (if by this we mean C2/DE, though many in DE are unemployed) who voted for Brexit. In fact, those describing themselves as "in employment" generally voted to Remain. Those describing themselves as Asian, black or Muslims overwhelmingly voted Remain. By contrast, nearly six in ten white Protestants voted to leave. 

Brexit was a rejection of British multiculturalism. That is the real take-home message of the Ashcroft polls. Of those who see themselves as "English not British", 80 per cent voted to Leave, irrespective of social class. Those who see themselves as "British not English" voted 60 per cent for Remain. Similar patterns (and similar press involvement) can be found in the Quebec referendum of 1995, which failed by a narrower margin than Brexit succeeded.

Of non-Francophone voters in Quebec, 95 per cent voted to remain in Canada. Those who voted to leave, on the other hand, were rejecting Canadian multiculturalism. Quebecois separatism was seen as part of a struggle for cultural survival.  

Whether or not you call those attitudes racist, the advent of white English (and Welsh) nationalism is, for those of us who have taught modern European history, the truly ominous consequence of Brexit. Do not be fooled by the alternatives.

Dr D’Maris Coffman is a Senior Lecturer in Economics of the Built Environment at UCL Bartlett. Before coming to UCL in 2014, she was a Fellow and Director of Studies in History at Newnham College and a holder of a Leverhulme Early Career Fellowship in the Cambridge History Faculty.