The National Institute for Economic and Social Research’s (NIESR) estimate of monthly GDP supports the MPC’s decision to hold tight. Its estimate of GDP suggests that output declined by 0.1 per cent in the three months ending in January after a fall of 0.5 per cent in the three months to December. January’s robust month-on-month growth (a rate of 0.6 per cent), NIESR suggests, is largely related to the recovery of output from the impact of adverse weather at the end of last year.
The most telling part of the release is that it finds that the underlying level of GDP “appears relatively flat over the last few months, suggesting the output gap is widening”. By the output gap, it means the level of spare capacity in the economy. The bigger it is, the lower inflation is and the higher the unemployment. Almost three years have passed since the onset of the 2008-2009 recession but the economy is still 4.25 per cent below the pre-recession peak (March 2008). Moreover, it is still around 10 per cent below where it would have been if growth had continued at the rate of growth experienced over the preceding five years.
The graph above shows the long slog the economy is going to face, even before austerity hits. It shows for four previous recessions and the current one — and how the recession progresses over time. So the blue line for the 1990s recession shows that i) output fell from peak to trough by less than 3 per cent; ii) after 24 months output had fallen by that amount c) after 36 months output was back to the level it had been at the start of the recession.
The current recession has been much deeper than that of the 1990s and much more comparable so far to the 1980s recession, which lasted for four years. Currently, we are nearly three years in and there is still a long way to go.
NIESR does not expect output to pass its peak in early 2008 until 2013, which would be around 60 months from when it started. So it would then be much longer-lasting than any of the other recessions that have occurred over the past century.
Worryingly, it could well be even worse than this still, unless the growth deniers running the coalition’s economic strategy reverse course soon.