Bucking The Trend

07/12/2012 at 3:53 pm

The Autumn Statement has been and gone. It is perhaps a sign of its steady-as-she-goes ponderousness that the most interesting question it raised was whether or not the shadow chancellor fluffed a line of his reply due to bamboozlement or a slip of the tongue. (There was certainly nothing like the expansion of VAT to Cornish pasties to get our teeth into.) Various claims have been made about the political points the Chancellor might or might not have scored: economically nothing has changed.

Which is of course to say that growth has disappointed, borrowing targets have been missed and the plan remains to hope we can muddle through the rough patch with modest aspirations towards balancing the books over the medium term. Numbers wise, real GDP growth for the next four calendar years has been revised down from the March estimate of 2.0%, 2.7%, 3.0% and 3.0% to a new estimate of 1.2%, 2.0%, 2.3% and 2.7%. Gross debt on a Maastricht basis, which was forecast to peak in fiscal 2014-15 at 92.7% of GDP, is now predicted to peak one year later at 97.4%. All of which looks as perfectly manageable as ever it did and has done nothing to faze markets.

It was the topic of growth in Britain and around the world with which the Chancellor led off his speech. In his first sentence he said that “the British economy is healing.”

Both the speech and the revised economic projections raise the question: what will a healed UK economy be doing? What would the growth rate be if we and the rest of the world weren’t so sick?

Estimates of the trend rate of growth have of course varied over the years. At the tail end of 1999 the Treasury put the long term growth rate at 2.25%, which it viewed as conservative. Since then GDP has grown at an average annual rate in real terms of 1.8%. Over a longer (30 year) timescale the average rate has been 2.6%. Perhaps an estimate of 2-2.5% is about right.

Whatever the precise trend rate might be, however, there is no evidence to suggest that 0% – which is what we’ve seen over the last four quarters now – is it. There are causes of this weakness we can point to: confidence effects, overseas effects, the contraction of real incomes and so on. But insofar as these prove transitory, the point is that the UK growth rate should be expected to rebound.

Similar effects are observable elsewhere. In the US, the Congressional Budget Office estimates trend GDP growth of 2.3% over the next ten years. The 30 year average is currently 2.8%. Last year, however, quarterly growth slowed to 0.1% at one point, taking the annual rate down to 1.6%. Most recently it had rebounded to 2.5%.

As we get closer to the end of the year it becomes more tempting to predict the future. This is a bit of a mug’s game. Where economic growth is concerned a key question still hangs over the longevity of the various headwinds which have been holding it back. Still, it is worth remembering that in many cases growth is indeed being held back relative to trend. That doesn’t mean the only way for it to go is up. But it does mean that’s the natural path for it to take.


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