A recovery that is still in recovery
Economic forecasting was invented, JK Galbraith said, to make astrology look respectable. Big, open economies like the UK’s are dynamic and complicated. It is hard enough to know for sure what is going on right now, since the data economists have to work with are partial and always at least a little bit out of date. How much harder, then, is it to forecast accurately? As the Office for Budget Responsibility has shown – and it is staffed by some bright people who have access to the best data going – it is very hard indeed. The OBR has had to “adjust” (that is, correct) its forecasts again and again over the past three years.
In fact it is fairer to say, as the OBR boss Robert Chote has happily admitted, that all forecasts are, by definition, wrong. But forecasts are all we have.
So when the Governor of the Bank of England (BoE) says, as he did the other day at the launch of the BoE’s quarterly inflation report, that he is “serene but not complacent” about economic recovery, he was not being quite as outlandish as you might think. The serenity is underpinned by the thought that the Bank is forecasting – forecasting – 3.4% GDP growth this year, followed by 2.7%/2.8% in the two years after that. But he is not complacent because, as he also observed, this economic recovery is nether balanced nor sustainable.
The “march of the makers” predicted by George Osborne in 2010 has failed to arrive. Business investment has been disappointing to say the least. Productivity has been poor. Even the good news on unemployment is tempered by the knowledge that not all the growth in jobs has been entirely positive. A million and half people are working part time who would rather be working full time. The growth in self-employment, rising by 367,000 in the past five years to 4.3 million, probably does not point to an explosion of high tech entrepreneurialism, but rather to what John Philpott has called an army of “odd-jobbers” struggling to make ends meet. Flatlining (or worse) productivity suggests that not many of the new jobs are highly productive.
So while the GDP numbers point to quite decent growth – from a very low base of course - the Bank believes interest rates must stay low. This “recovery” does not really feel very much like one to most people. Wages are not rising much, yet, and inflationary pressures are minimal. Growth seems to be coming from increased consumer spending, which in turn is based on reduced saving and renewed credit growth. Adair Turner has said that Britain’s cure for the debt hangover seems to be to pour ourselves a stiff drink. And Martin Wolf in the FT writes that “In the UK people are celebrating the restarting of the very process that ended in this huge disaster.”
Never mind “the wrong kind of snow” – we seem to have the wrong kind of economy, one that cannot grow either healthily or fast enough. Wages are too low for too many people, while business investment is too weak. Skills shortages inhibit better growth. And our balance of payments (exports verses imports) is weak.
Without greater productive capacity, and better jobs, Britain will not be able to earn its way out of this economic dead end. We don’t just have to try harder, we have to do better. And there are no sensible short cuts on offer. We cannot shop our way to a stronger economy. There is no good alternative to a higher skilled, more long-term focused approach. And that new approach cannot come quickly enough.