View all newsletters
Sign up to our newsletters

Support 110 years of independent journalism.

  1. Business
  2. Economics
31 March 2012updated 26 Sep 2015 7:46pm

In the slow lane

New economic forecasts from the OECD show how bad austerity has been for growth.

By Tony Dolphin

The OECD’s latest interim assessment of the outlook for the G7 economies, published on 29 March, suggests the UK economy is back in recession (usually defined by economists as two consecutive quarters of falling real GDP). A day earlier the Office for National Statistics published revised national accounts data showing real GDP contracted by 0.3 per cent in the final quarter of 2011. In its report, the OECD says it thinks this will be followed by a 0.1 per cent contraction in the first quarter of 2012.

The Office for Budget Responsibility (OBR) takes a more optimistic view in its latest forecast, published alongside the budget. It thinks the economy will grow by 0.3 per cent in the first quarter.

Differences in opinion between groups of economists over the outlook for the economy are not unknown, but it is a little surprising that two essentially consensual bodies like the OECD and the OBR have come up with such different forecasts for the current quarter, particularly when we are already at the end of March.

Typically, when trying to forecast very recent developments in the economy, economists look at surveys of business confidence. These have been shown to be the most reliable indicators of short-term fluctuations in activity (measures of consumer confidence are much less useful) and they support the OBR’s forecast over the OECD’s. Indeed, the OBR cite an improvement in survey evidence to justify their optimism that the economy will expanded in the first quarter.

Select and enter your email address Your weekly guide to the best writing on ideas, politics, books and culture every Saturday. The best way to sign up for The Saturday Read is via saturdayread.substack.com The New Statesman's quick and essential guide to the news and politics of the day. The best way to sign up for Morning Call is via morningcall.substack.com Our Thursday ideas newsletter, delving into philosophy, criticism, and intellectual history. The best way to sign up for The Salvo is via thesalvo.substack.com Stay up to date with NS events, subscription offers & updates. Weekly analysis of the shift to a new economy from the New Statesman's Spotlight on Policy team. The best way to sign up for The Green Transition is via spotlightonpolicy.substack.com
  • Administration / Office
  • Arts and Culture
  • Board Member
  • Business / Corporate Services
  • Client / Customer Services
  • Communications
  • Construction, Works, Engineering
  • Education, Curriculum and Teaching
  • Environment, Conservation and NRM
  • Facility / Grounds Management and Maintenance
  • Finance Management
  • Health - Medical and Nursing Management
  • HR, Training and Organisational Development
  • Information and Communications Technology
  • Information Services, Statistics, Records, Archives
  • Infrastructure Management - Transport, Utilities
  • Legal Officers and Practitioners
  • Librarians and Library Management
  • Management
  • Marketing
  • OH&S, Risk Management
  • Operations Management
  • Planning, Policy, Strategy
  • Printing, Design, Publishing, Web
  • Projects, Programs and Advisors
  • Property, Assets and Fleet Management
  • Public Relations and Media
  • Purchasing and Procurement
  • Quality Management
  • Science and Technical Research and Development
  • Security and Law Enforcement
  • Service Delivery
  • Sport and Recreation
  • Travel, Accommodation, Tourism
  • Wellbeing, Community / Social Services
Visit our privacy Policy for more information about our services, how New Statesman Media Group may use, process and share your personal data, including information on your rights in respect of your personal data and how you can unsubscribe from future marketing communications.
THANK YOU

Unfortunately, the OECD is less forthcoming about the reasons for its pessimism. It does, though, also forecast a recession in the three largest euro zone countries, taken together, and it may be that its economists believe this will cause a recession in the UK too.

What the OECD forecasts do show, however, is that even if the OBR are right about the outlook for the UK in coming quarters, the UK is experiencing a relatively slow economic recovery. Four years after the economy went into recession, real GDP will still be almost 4 per cent lower than at its peak. This makes the recovery slower than any economic recovery in the UK in the last century; it also means that the UK recovery is slower than those of all the other G7 economies bar Italy.

Why is this the case? In a recent speech, Adam Posen, one of the external members of the Bank of England’s Monetary Policy Committee, analysed the gap between the recovery in the US and the recovery in the UK. He concluded that it was largely the result of differences in fiscal policy. The more aggressive fiscal tightening in the UK led to weaker consumer spending growth, which in turn helped explain why investment had failed to recover in the UK as fast as in the US.

When it came to power, the coalition argued that it had no choice but to increase taxes and make substantial cuts in public spending to eliminate the fiscal deficit over the course of four years (a timetable that has now been extended to six years). It also argued that this would not be bad for growth because private sector activity would expand to fill the gap left by the public sector.

The first proposition is still open to debate – and without a counterfactual we will never know for sure whether the government was right or not. But the second proposition has been shown to be false. Whether the OECD or the OBR are proved to be right about growth in the first quarter of 2012, by any measure the economic recovery in the UK has been hugely disappointing since the coalition took office.

Rather than stimulate activity in the private sector, austerity in the public sector has made it less willing to invest and recruit. Fiscal tightening has been bad for growth.

Tony Dolphin is the senior economist at ippr

Content from our partners
The promise of prevention
How Labour hopes to make the UK a leader in green energy
Is now the time to rethink health and care for older people? With Age UK

Select and enter your email address Your weekly guide to the best writing on ideas, politics, books and culture every Saturday. The best way to sign up for The Saturday Read is via saturdayread.substack.com The New Statesman's quick and essential guide to the news and politics of the day. The best way to sign up for Morning Call is via morningcall.substack.com Our Thursday ideas newsletter, delving into philosophy, criticism, and intellectual history. The best way to sign up for The Salvo is via thesalvo.substack.com Stay up to date with NS events, subscription offers & updates. Weekly analysis of the shift to a new economy from the New Statesman's Spotlight on Policy team. The best way to sign up for The Green Transition is via spotlightonpolicy.substack.com
  • Administration / Office
  • Arts and Culture
  • Board Member
  • Business / Corporate Services
  • Client / Customer Services
  • Communications
  • Construction, Works, Engineering
  • Education, Curriculum and Teaching
  • Environment, Conservation and NRM
  • Facility / Grounds Management and Maintenance
  • Finance Management
  • Health - Medical and Nursing Management
  • HR, Training and Organisational Development
  • Information and Communications Technology
  • Information Services, Statistics, Records, Archives
  • Infrastructure Management - Transport, Utilities
  • Legal Officers and Practitioners
  • Librarians and Library Management
  • Management
  • Marketing
  • OH&S, Risk Management
  • Operations Management
  • Planning, Policy, Strategy
  • Printing, Design, Publishing, Web
  • Projects, Programs and Advisors
  • Property, Assets and Fleet Management
  • Public Relations and Media
  • Purchasing and Procurement
  • Quality Management
  • Science and Technical Research and Development
  • Security and Law Enforcement
  • Service Delivery
  • Sport and Recreation
  • Travel, Accommodation, Tourism
  • Wellbeing, Community / Social Services
Visit our privacy Policy for more information about our services, how New Statesman Media Group may use, process and share your personal data, including information on your rights in respect of your personal data and how you can unsubscribe from future marketing communications.
THANK YOU