At the press conference to mark his valedictory inflation report, Mervyn King, the governor of the Bank of England, not for the first time asserted that “a recovery is in sight”. I nearly fell over laughing when I heard him say that. Here we go again. Some growth is better than none, I suppose, and you can always draw a straight line between two data points, but that doesn’t constitute a recovery – far from it. What does King mean by a recovery? Growth of 0.2 per cent a quarter wouldn’t cut it. Growth of 5 per cent or even 3 per cent doesn’t seem to be on the cards. I would be surprised to see growth of more than 1 per cent this year and next, if we are lucky. Long gone are the heady days under Alistair Darling when the economy grew at an annual clip of 2.5 per cent, rising for five quarters in a row from the third quarter of 2009 to the third quarter of 2010.
This looks like King and George Osborne’s lost decade. Of course the governor will head off to the lucrative lecture circuit in a month or so and try to blame everyone else for his failings, including Gordon Brown, but the facts speak loudly. Even by the start of September 2008, a couple of weeks before the fall of Lehmans and a month before the failure of the Royal Bank of Scotland (RBS), King had not spotted the greatest recession of our lifetime. He had no credible proposals to bail out the banks; said that he hesitated to intervene because of “moral hazard”, and apparently was taken by surprise when RBS failed. He then compromised the independence of the Bank of England by supporting what turned into the failed fiscal austerity policies of the coalition government.
The Bank of England’s Monetary Policy Committee (MPC) is now forecasting that growth by the end of this year will average more than 2 per cent, which it suggests will continue through to the election in 2015, with some significant chance that growth could be above that. Chance would be a fine thing. This is Osborne’s great hope and why, in his speech to the Confederation of British Industry on 15 May, he said: “We will stick with our approach.” And yet the Tory back benches don’t seem to be buying it.
The MPC has little credibility left – recall that it has been forecasting, wrongly, that growth would be soaring away in every inflation report for at least five years.
At the launch of the May 2011 report, King said: “No one knows how the economy will evolve over the next few years, nor how policy will need to respond.” I looked back at the projections that the MPC made for growth in that May 2011 report for the two most recent quarters for which we have data, q42012 and q12013, which in sum showed absolutely no growth at all. The mean forecast in that 2011 report was for the economy to have grown by nearly 1.2 per cent over these two most recent quarters, against the zippo increase registered. King was right that the MPC has no idea how the economy would evolve. Just to place the poor performance of the UK economy under his reign in context, the table (see below left) reports GDP growth for 20 OECD countries as well as the European Union (EU) and the eurozone, ranked by expansion over the past ten quarters since q42010 (eight countries have only nine quarters of data available). The UK ranks below both France and Ireland. The United States has grown nearly four and a half times more than the UK has done over this period.
Are there any signs that the economy is “healing”, as Osborne claims? Not many. There is rather mixed evidence from business surveys: the purchasing managers’ surveys showed some pick-up, but the Bank of England agents’ surveys suggest little improvement. The EU’s Economic Sentiment Index, which combines consumer and business surveys, fell again in April. The labour market continues to weaken. Underemployment is rising again; there has been a further surge in the number of people who are parttime but want full-time jobs.
A big increase in long-term unemployment was also bad news, as was a further weakening of wage growth. Youth unemployment remains at record levels. On the month, weekly wages fell by 0.7 per cent and the Consumer Prices Index rose by 2.4 per cent – less than the MPC had forecast just this past week, but still real wages continue to fall sharply. It is unlikely that, with such uncertainty in the air and shrinking wages, consumers are heading for a spending spree. The patient is still in intensive care.
The EU has gone back into recession, private investment continues to decline and banks are still not providing credit. Net lending to businesses, especially small businesses, remains negative and there are more government spending cuts on the way. The fat lady may be about to start singing, but she hasn’t shown up to the hall yet and may well be lost in traffic. They were bloody warned.
David Blanchflower is the economics editor of the New Statesman. He served on the MPC from 2006 to 2009