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24 January 2014

Larry Summers reminds Osborne that the UK economy is still smaller than before the crash

The former US treasury secretary points out to the Chancellor that while the US economy exceeded its pre-recession peak years ago, the UK is still catching up.

By George Eaton

At the end of a week in which the Tories have become ever more boastful of their economic record, Keynesian lion Larry Summers delivered some hard truths to George Osborne at Davos this morning.

Summers, who served as treasury secretary to Bill Clinton and as director of Barack Obama’s National Economic Council, rightly noted that, more than five years on from the crash, UK GDP remains below its pre-recession peak. He said (from 1:10 onwards): 

If you compare the United States and Britain, it was a couple of years ago that we exceeded our previous peak GDP, that’s something that is still being sought in Britain.

Indeed, while US GDP is now 5.6 per cent above its pre-crisis level (thanks in part to greater fiscal stimulus), UK GDP is 2 per cent smaller than in 2008. 

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To this, Osborne responded by pointing out that the recession was deeper in the UK than in the US. He said: “We did have a much deeper fall in GDP and, for a banking sector that is the same size as the US’s, in an economy a fifth or sixth of the size, the impact of the financial crisis was even greater in the United Kingdom than it was in the States. The great recession in the UK had an even greater effect and we were one of the worst affected of any of the major western economies.

But as Summers (who is working with Ed Balls, his former Harvard pupil, on a transatlantic commission on “inclusive prosperity”) smartly retorted:

The deeper the valley you are in, the more rapidly you are able to grow. 

It’s also worth buying this week’s NS to read Felix Martin on this subject. Here’s an extract: 

When I first started out on the bond markets, an older and wiser colleague took it upon himself to warn me of the pitfalls of dealing with unscrupulous brokers. “Watch out for salesmen selling recovery stories,” he advised. “Never forget the definition of a bond that was down 50 per cent and then recovered 50 per cent. It’s a bond that has lost 25 per cent.” I can’t help thinking of this homely piece of wisdom every time I read another story about the UK’s loudly hailed recent recovery.

It is true that the UK’s gross domestic product (GDP) grew by nearly 2 per cent in the four quarters to September 2013, compared to barely more than 1 per cent over the whole two years before that.

The trouble is that this still left the economy nearly 2 per cent smaller than it was at the end of 2007 – more than six years ago. As my former colleague pointed out: when there’s been a precipitous crash, you need to pay attention to levels of growth as well as growth rates if you want to avoid bamboozlement by sales pitches.