Agony in the UK

UK growth managed to avoid the worst possibility of a triple-dip recession, but economic performance is still weaker than it was around the Great Depression.

Things must be pretty grim when analysts, economists and the markets are euphoric over 0.3 per cent GDP growth.

But this is what happened overnight when the UK released it March quarter GDP results. It shows how dismally weak the structure of the UK economy is right now when the small upside surprise for GDP and the perception that a triple-dip recession has been avoided sparks a market rally and an outpouring of positive assessments about a near basket case country.

The news that GDP in the UK rose 0.3 per cent in the March quarter was ‘good’ only because it beat the market consensus forecast for 0.1 per cent growth and avoided the most pessimistic forecasts that GDP would actually fall, thereby delivering a headline grabbing triple-dip recession.

Even with the marginal upside surprise to GDP, the size of the UK economy remains a numbing 2.6 per cent smaller than the pre-banking crisis peak in the March quarter 2008. It keeps in place the unwelcome fact that the economic performance over those six years is actually weaker than the UK experienced when falling into and recovering from the early 1930s Great Depression.

This run of economic growth in the UK is another deep blow to the advocates of fiscal austerity programs, even when a country has what appears to be high levels of government debt and a chronic budget deficit problem.

The Cameron government, on winning the election in May 2010, embarked on a helter-skelter campaign to raise taxes and cut government spending as it sacrificed all else for the sake of reducing the budget deficit and stemming the rise in government debt.

In addition to pole-axing the economy, this policy approach simply has not delivered. Net government debt has risen from 73.9 per cent of GDP in 2010 to 80 per cent in 2011, 86.4 per cent in 2012 and 90.7 per cent in 2013. 

Fitch, the credit rating agency, downgraded its UK credit rating last week on the assessment that net debt would still rise and reach 101 per cent of GDP in 2016.

It is also sobering to note that the UK budget deficit peaked at 11.2 per cent of GDP in 2010 and with the austerity drive unfolding, the deficit will still be 7.5 per cent on GDP in 2014. Even with rosy economic projections, the deficit is projected to fall to 2.3 per cent of GDP in 2018.

Despite – or is that because of – the fiscal austerity delivered by the Cameron government, net government debt will have blown out by 27 per cent of GDP in six short years from 2010 while the economy is still smaller than it was in 2008 and is likely to remain that way until early 2015.

This is the sort of fundamental position that suggests the UK will be condemned to a scrap heap economy in the years ahead.

The UK economy is so poor, so dismally mired in economic quicksand that in US dollar terms per capita GDP is estimated by the IMF to be just $US38,600, which is 24th in the world. This compares with $US67,700 in Australia, $US52,200 in Canada and $US49,900 in the US. On current trends, New Zealand is likely to overtake the UK in per capita GDP terms in the next year or so 

The UK has fallen away so quickly that it is now a mediocre middle income country.

After the GDP result yesterday, UK Chancellor of the Exchequer George Osborne said “today’s figures are an encouraging sign the economy is healing. Despite a tough economic backdrop, we are making progress.” The facts suggest that this is an exaggeration – though understandable as it was Osborne who is pulling the austerity levers the hardest.

The problem with the UK is compounded by the fact that the Bank of England has set interest rates at a record low 0.5 per cent since March 2009 and has embarked on £375 billion of quantitative easing as it has tried to kick-start the economy. Other than printing more cash, there is little more the bank can do.

The only saving grace for the UK has been the freely floating British pound, which has crashed around 35 per cent over the past five years and thereby has helped sustain the export sector. Perhaps the pound needs to fall further if the UK is ever to register a decent and sustained economic expansion ever again.