Third quarter GDP figures signalled the end of the ‘double-dip’ recession, with the economy bouncing by 1%, helped by some special factors. The figures have not, however, settled the debate about whether the economy can now enjoy a sustained recovery, or the puzzle over very weak productivity growth.
It may be that the story is the same every quarter for the foreseeable future, but it is hard these days to think of more keenly-awaited figures than the Office for National Statistics’ preliminary estimates of gross domestic product (GDP).
When they are bad, they spark hundreds of negative headlines and make us all, whether in our business or personal lives, feel a bit more miserable. When they are good, they offer some cheer, though the caveats around the data – highlighted by opposition parties and downbeat economists – not as much cheer as you would hope for.
The third quarter GDP figures were good. The 1% quarterly rise in GDP they showed was better than analysts had expected. On the morning of their release, predictions were clustered around little better than a 0.5% rise. The GDP numbers were good news.
Over the summer, it appeared the coalition’s economic strategy was in ruins. The economy, it seemed, had shrunk on their watch. The new numbers mean that is comfortably no longer the case. They put the economy decisively back into growth. They also suggest, according to the official statisticians, that on an underlying basis the economy has been growing again since the spring.
What do the figures mean for the future? There has been more discussion about the reliability of the official figures in recent months than I can recall ever before. It boils down to whether employment can be so strong – up more than half a million over the past year and more than 200,000 in the latest three months – when growth was apparently so weak.
The combination of weak growth and rising employment is not only an unusual one, if it lasts it is a worrying one. It means that productivity, the long-term driver of economic prosperity, is falling. In the year to the second quarter it was down 1.3% on an output per worker basis, and 2.6% when measured according to output per hour. We have yet to see the third quarter productivity figures but they will show an improvement.
They will not, however, resolve the productivity puzzle. Since 2009, when the economy emerged from the first and more serious recession of the global financial crisis, productivity has scarcely grown at all. Normally, you would expect productivity to grow by about 2% a year. In the early stages of recovery it would be expected, if anything, to be faster.
Typically in a post-recession period, firms do their best to economise on staff in order to squeeze out additional productivity. Their failure to do so this time, even in an environment where pay increases have been subdued, is a real-world mystery that goes beyond the statistics.
It is also a phenomenon that is unlikely to last. Perhaps firms really were hoarding and recruiting labour in anticipation of a much stronger upturn in demand. The logic of both the statistics and real-world practice was that if growth did not pick up soon, there will have to be a shake-out of employment.
It may be that the financial crisis and its aftermath has affected the economy’s ability to improve productivity. Before the crisis, to take one example, financial services generated productivity at a rate of 4% a year. Since it, productivity has been falling by 3% annually.
There is, though, some inevitability about productivity growth. It tends, in the jargon, to be mean-reverting, in other words it grows at roughly the same rate in the long run. If it mean-reverts any time soon, it will not be good news for jobs. It would be an irony if, just as an easing of the squeeze on real incomes as a result of lower inflation appeared set to deliver stronger growth in consumer spending, a new wave of job cuts snuffed it out.
So there are domestic dangers. The good news from George Osborne in his Autumn Statement on 5 December will be that slippage on the budget deficit will not result in additional tax rises and spending cuts. The bad news is that there is a lot of previously announced austerity yet to come. We are still waiting to see whether the Treasury/Bank of England £80bn funding for lending scheme will succeed in getting more credit to small and medium-sized firms and mortgage borrowers.
The risks are not all at home. This is far from benign international environment. The eurozone crisis may have been contained, for now at least, but it is a long way from being resolved. Germany has been one of the stars of the post-crisis period but it is now flirting with its own double-dip recession. There is a similar picture in Japan.
America’s modest recovery, which is close to the slowest in the post-war era, is being impacted by political uncertainty and the risk that the ‘fiscal cliff’ of emergency tax hikes and spending cuts (equivalent to a staggering 4.7% of gross domestic product) will kick in at the beginning of 2013 if the politicians cannot agree on smaller and more sensible deficit reductions. Even the Chinese economy has slowed, its third quarter growth rate of 7.4% representing the seventh quarterly slowdown in a row.
So can growth persist? Double-dips are rare, triple-dips even more so, though these are unusual times. The hope is that the economy can now develop some momentum and build on those strong third quarter GDP figures. The fear is that the recovery will remain vulnerable to setbacks. Those quarterly GDP figures will be closely watched for a while yet.
