How bad is the UK economy doing?
Bad enough that the US growth numbers seem “strong” in comparison. At the New Statesman, George Eaton writes:
One of George Osborne’s favourite boasts is that the UK economy has grown by more than the US economy this year. He consistently cites this fact as proof that austerity, not stimulus, is the way to grow the economy. This passage, from an Osborne op-ed for the Telegraph in August, is typical:
The US economy has grown more slowly than the UK economy so far this year, despite fiscal stimulus in the former and fiscal consolidation in the latter, showing that the problem is not too much fiscal responsibility.
His basic claim is not wrong. In the first two quarters of this year, the US economy grew by 0.3 per cent (0.1 per cent in Q1 and 0.2 per cent in Q2), while the UK economy grew by 0.5 per cent (0.4 per cent in Q1 and 0.1 per cent in Q2). (Although, of course, the UK economy shrunk by 0.5 per cent in the fourth quarter of 2010, while the US economy grew by 0.6 per cent.) But today’s better-than-expected US growth figures have raised the bar for Osborne. In the third quarter, the US economy grew by a relatively impressive 0.6 per cent (or an annual rate of 2.5 per cent).
It’s a figure that few economists expect the UK to match when the Q3 GDP figures are published on Tuesday. Growth in the second quarter was recently revised down by the ONS to just 0.1 per cent and the Q3 figure is unlikely to be much better.
The challenge is clear. Unless the Q3 growth figure is at least 0.5 per cent, Osborne will no longer be able to boast that the UK has grown by more than the US this year.
Are those “better-than-expected” growth figures actually impressive? Here’s Dean Baker:
It is very difficult to view 2.5 percent growth as much less than disastrous. At this rate the economy is growing just fast enough to keep pace with the growth of labor force.
That means we are making zero progress in reducing the unemployment rate. If the economy continues to grow at a 2.5 percent pace, the unemployment rate will remain around 9 percent indefinitely with tens of millions of people unemployed, underemployed or out of the labor force altogether. These people are seeing their lives needlessly ruined because the well-paid people who manage the economy are not competent at their jobs.
The only context in which this growth can be seen as positive is compared with the alternative of a double-dip recession.
To go back to Osborne’s op-ed, it’s unclear why the United States in 2011 should serve as a model of fiscal expansion. The stimulus package passed in 2009, after which growth began improving (chart via Jared Bernstein):
Playing around with the Trading Economics GDP charts, here is the course of US growth since January 2009, the month before the stimulus was enacted:
There’s no clear way to draw exact causation from this, of course. The basic point is that George Osborne is wrong to point to US growth in 2011 as a product of fiscal stimulus. If the UK economy continues to grow so weakly that the US figures seem impressive in contrast, Osborne has bigger things to worry about.