British Economic Growth Dissected

March 30, 2010

The Great Recession knocked the stuffing out of the British economy, depressing real GDP by 6.2% between the first quarter of 2008 and the third quarter of 2009.  The U.K. had been one of the Group of Seven’s more vibrant economies earlier last decade, expanding at a 2.7% pace over the period’s first eight years through 2007 compared to growth of 2.6% per annum in the United States, 2.1% per annum in Euroland, and 1.7% per annum in Japan.  In contrast, Britain grew just 0.6% per annum on balance over the last five calendar years beginning with 2005 and ending with 2009.  During those five years, business gross fixed capital formation fell 0.7% per annum, while personal consumption, government consumption, and exports recorded annualized growth of 0.8%, 1.9% and 1.1%.

In 2009, real GDP declined 4.9% despite positive contributions of 0.71 and 0.46 percentage points (ppts) from net exports and government spending.  These supports were overwhelmed by drags of 2.6, 2.1, and 1.4 percentage points from business investment, personal consumption, and inventory disinvestment.  An examination of major industrial sectors finds both production, which includes manufacturing, mining and utilities, and construction with plunges of slightly more than 10% in 2009.  These were augmented by drops of 4.4% in agriculture and 3.5% in services, the latter of which represents roughly three-fourths of GDP.

The final quarter of 2009 saw real GDP increase for the first time since the first quarter of 2008.  A tepid recovery began with GDP advancing 1.8% at a seasonally adjusted annual rate (saar) in spite of negative contributions of 1.7 ppts and 1.3 ppts from business spending and net exports.  The main boost of 3.1 ppts came from inventories.  Among the elements of final private aggregate demand, on-year decreases from 4Q08 were recorded of 14.0% in business investment, 4.8% in exports, and 2.1% in personal consumption.  Real GDP as a whole was 3.1% less than in the final quarter of 2008, a horrid quarter of its own that saw GDP slump by 7.0% annualized.

All the advanced economies have dug themselves a huge hole, Great Britain particularly so.  It will take considerably longer to climb back than the period of free-fall.  Prior to the Fed-facilitated rescue of Bear Stearns by JP Morgan two years ago, the financial market difficulties were not perceived in the broader context of a severe global recession.  In calibrating the return from recession, two benchmarks have particular significance.  The first occurs when GDP surpasses its former cyclical peak.  Business cycle theorists often distinguish the stages of a business upturn before and after this point is reached by calling the present and first stage “recovery” and the latter portion “expansion.” 

If British real GDP were to rise at the weak pace of the final quarter of 2009, it would take 3.5 more years, that is until mid-2013, for such to eclipse its peak level of 1Q08.  And even if GDP were to expand along the lines projected in last week’s Labour government budget, which seem unrealistically optimistic, the recovery stage will not be completed until the middle of 2012.  Now consider a different thought experiment in which no world recession occurred and British GDP had continued to advance along the 2.7% per annum vector that it traveled between 1999 and 2007.  Actual GDP last quarter was already about 12% below that constant 2.7% path.  Assumed growth in the budget merely keeps this gap from widening but will not shrink it.  Continuing growth that matches the pace in 4Q09 would mean that in mid-2013 when the size of Britain’s economy merely gets back to its 1Q08 cyclical peak, real GDP will be 15.5% short of its post-1999 constant vector of 2.7% per annum.

Britain is one example of many.  For the advanced world, the Great Recession was not a mere bump in the road or even a time-consuming detour.  Advanced economies have been through a landscape-changing catharsis.  It may take a generation to get back to where the world might have been had the collapse not occurred.  And to paraphrase Satchel Paige, advanced nations mustn’t look back because the emerging ones are gaining on them.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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