Even though most economists were expecting another negative quarter of growth, yesterday’s UK GDP data were still shocking. Everyone already knew that the extra bank holiday for the Jubilee would hit activity, and that the wet weather might have discouraged some ‘normal’ seasonal spending. But, even taking these factors into account, most economists were expecting a number like -0.2%. The fact that the economy nosedived by 0.7% means that something is very wrong.
There will be the usual tendency to blame this on the euro crisis. But the uncertainty stemming from events across the channel is nothing new – we have been living with this sovereign debt crisis for almost three years now. The main impact of uncertainty in delaying business investment and other spending, and encouraging those companies that can to build up cash reserves, has already been felt. Developments since last year will probably have had only a marginal extra impact.
No, the signs are more and more that this new recession has been made in Downing St and Threadneedle St. Much as it pains me to agree with Ed Balls, it really does look like the Government cut too far too fast – and, when confronted with the fact the policy wasn’t working, failed to change direction. The UK’s AAA rating is under threat now precisely because fiscal policy has massacred growth.
The Bank of England must take a share of the blame as well. By the autumn, the MPC will have authorised the creation and spending of Â£375bn – roughly a quarter of the UK’s annual economic output. Such a monetary expansion would have been unbelievable five or six years ago. And yet it hasn’t worked. Mounting academic evidence suggests that the impact of quantitative easing (QE) has been far less than the BoE has claimed. Like every dodgy salesman or job candidate, the Old Lady is guilty of over-egging her achievements.
The MPC should long ago have diversified its spending to include private sector assets. Academic research and what limited practical evidence we have suggest that this would have been the obvious way to get more bang for our bucks. Economists that had previously studied Japan warned that purchases of government bonds wouldn’t be a panacea. Adam Posen, who has studied Japan, made exactly the same point but was unable to convince BoE Governor Mervyn King. Posen is now leaving rather than serve another term – once again, it looks like Mervyn has driven out someone that dares to disagree with him, despite the fact that they (Posen, Blanchflower) were right.
The fact that the economy should bounce back in Q3 is no cause for celebration. The recovery is still much weaker than it should be. Monetary and fiscal mis-management have now almost certainly deepened the economic scars that the country suffered from the financial crisis. For that, the blame can be laid squarely at the feet of Osborne and King. UK residents have been massively let down by their policymakers.
PS Careful readers of yesterday’s GDP data (ie, nerds like me) will also have spotted another implication in the data. As the extra bank holiday drops out of the measurement period, growth in Q3 should get a boost, although the overall level of output may not be very different from Q1. This implies that the echo of the bank holiday will probably provide more impetus to Q3 growth than the Olympics. Which in turn implies that the macro impact from latter will be pretty small. I told you so, Mr Cameron.