It has not been a great recovery, but not as bad as we have been led to believe – and that is not just because of sex, drugs and rock & roll being counted in national output.
We have just got the huge update of national statistics, which give a much-clearer picture of what has been happening both in the recession and the recovery.
This is not the final word on such matters and I expect there to be further revisions, but the data is a lot better than the stuff we have had to date. Both the so-called Blue Book (which gives detailed figures for the national accounts) and the Pink Book (which does the same for the balance of payments) are affected.
As far as the national accounts are concerned there are two main stories. The first is that there have been a number of changes to the way that output is measured, and the effect of these is to make GDP appear about 4 per cent bigger than previous calculations suggested. The second is that quite irrespective of these changes in methodology, we have been undercounting growth in GDP, particularly during the current recovery. A word about each.
The fun bit first. One of the changes in GDP is that activities previously excluded, such as prostitution and illegal drugs, are now counted as part of national output – rock & roll was probably mostly in there already. Technically that is correct. If people decided to spend their money on drugs rather than say, booze, that is their choice and it is not rational to include one form of consumption in GDP but not the other.
There are further and arguably more-important changes, for example counting research and development differently, and including employers’ pension contributions in the savings figures. The result is that our R&D no longer appears to be so much lower than that of other developed countries and our savings ratio is also no longer so low either. Thus our household savings ratio, previously thought to have dipped right down to 2 per cent in 2007 and 2008, was actually around 6 per cent. This is all detailed stuff, quite technical but very helpful, for it is simply adding up the sums in a way that gives a better picture of the economy. It is, so to speak, a series of clearer still pictures.
The other story is about the moving picture, and in particular the extent to which we have been talking down the recovery. The top graph shows what happened to annual growth during the 15 years 1988 to 2012. The black bars are the initial estimate for growth, the red ones the latest estimate. In five of the years the initial estimate was higher than the current one but in 10 they were lower. The recession was not quite as bad as billed at the time and the undercounting was particularly evident in 2011 and 2012. The original figures suggested that growth had ground almost to a halt: only 0.3 per cent growth in 2012. That gave rise to all that nonsense about a double-dip recession. Now this has been revised up to 0.7 per cent, not great but much closer to the 1 per cent growth some of us felt intuitively was about right.
You can see the impact of these revisions on the cycle, as compared with previous recessions, in the bottom graph. The red line is the early 1990s recession, the gold line the 1970s one, and the grey line the early 1980s one. The blue line at the bottom is the initial estimate for the latest recession, which as you can see shows how bad it appeared to be compared with previous cycles. It still looks bad, but not quite as bad as before, for the black line just above it is the latest estimate. It stops in 2012 because that is as far as the revisions go, but I have taken the original estimates for quarter-on-quarter growth since then and extended the solid line with a dotted one.
This probably still understates what has happened because the latest figures are likely to be revised up too, but as you can see the economy passed its previous peak a full year earlier than thought. In other words we passed the peak in the spring or summer last year, not this year – as the headlines a few weeks ago told us. Now the statisticians assert the recession is still the longest since the Second World War. That is quite correct. But it seems to me that they should equally make the point they have misinformed us about its duration and stress we passed the previous peak a year ago.
I make that point not to be political. I don’t think the Coalition or indeed the previous government deserve particular praise or condemnation for their handling of the recession once it had begun.
The mistakes go back earlier to the boom years when we did not use that time to build surpluses. I simply make the point to show that the figures, when initially published, were wrong – as some of us knew at the time and said so.
But it’s time to stop looking back; let’s look forward.
The big issue now is when to start tightening monetary policy. The official figures suggest that growth is running at around 3 per cent, maybe a little more.
Intuitively, looking at the employment figures in particular, I suspect that this is understating what is happening and that growth is running at around 4 per cent.
The latest surge in services’ purchasing manager indices, out yesterday, would support this view. There is as yet little sign of pressure in the job market, thanks to substantial immigration and the increase in people of retirement age remaining in employment, often self-employment.
There must also be great scope for an increase in productivity, which is still even on these new figures, well below its previous peak. But an economy growing at 4 per cent a year does not need zero interest rates, does it?