Over the past few years, the world economy has faced a number of shocks that can be described as anything but ‘normal’. Global GDP fell by 2.8% in 2020, then bounced back from its Covid-induced recession, growing by 6.3% in 2021 (the highest since IMF records started in 1980) as vaccines became widely available.
The UK did even better, growing 8.7% in 2021, after a poorer-than-average decline of 10.4% in the previous year – both figures were probably exaggerated by a system of measurements of the public sector that are probably better suited to normal times but didn’t really help during the Covid disruption. Cebr projected 8% growth that year as early as December 2020. By comparison, the OBR were still forecasting growth at only 4% as late as March 2021. Most people described our view as optimistic – the data now shows that we were in fact too pessimistic about the outcome.
However, after a trampoline bounce, both the world and the UK economies have returned to fairly slow growth, temporarily even slower as the world adjusts to the impact of the Ukraine war and to the inflationary consequences of the fiscal and monetary incontinence applied during the Covid period.
Between January and July 2020, the US money supply grew by 20%. Friedman and Schwartz’s epic monetary history of the United States started in 1867 and has never recorded such high growth, even year-on-year, let alone over a six-month period. The only nearly comparable period was during the US Civil War, where the Federal Government printed money during the whole war, with monetary growth of 25% over the war (the Confederates increased their money supply by 20 times – allegedly pushing up the cost of living by 92 times according to wiki). The 2020 rate of monetary growth, alongside post-Covid supply shortages and the Ukraine war, saw average global inflation rates more than double over the course of 2021, according to Bloomberg.
The primary task for governments around the world is now to get inflation back under control. This is being done mainly by monetary means, leading to an end of the period of virtually free money that persisted post-financial crisis and which was enhanced during Covid. Interest rates, especially bond yields, are back to 1990s levels.
In addition, most governments have found it difficult to get out of their post-Covid spending commitments. In the OECD area, spending as a share of GDP rose from 40.8% in 2019 to 48.5% in 2020. Many governments have managed to bring these figures most of the way back down, but the UK and the Eurozone seem now stubbornly stuck near the 50% mark. The boost to spending has been financed partly by debt and partly by higher taxes.
As well as expanding public spending, bureaucrats around the world used their unprecedented peacetime powers to impose a host of new restrictions on businesses, especially to promote Net Zero policies. While it is right that governments look to reduce carbon emissions, it is an economic fact that most of these policies are costly, and some, relying on technology that does not yet exist, may not work.
We are ending up with two consequences. Inflation may be harder than expected to subdue, reinforced by higher price and wage expectations. And interest rates are unlikely to return to zero, likely remaining above inflation for most borrowers when rates do come down as a result of persistent high government indebtedness.
Long-term growth is more determined by supply-side policies, by the growth of the labour force and by productivity growth than macro policy. However, productivity growth has been stubbornly slow, and in the UK public sector, it has been significantly negative. Although Net Zero might, in theory, boost technology and hence productivity, the way in which it has been implemented so far has both reduced productivity and boosted inflation.
Meanwhile, the technological advances that burgeoned during Covid, such as online meetings, haven’t always worked as well as they could in helping businesses. AI and other burgeoning new technologies have the potential to raise productivity but seem stuck in the nice-to-have phase rather than having current business applications that will ultimately add value.
My own view (which is, of course, not that of the Cebr, an inherently apolitical organisation) is that the UK will only get back to the sort of economic growth that it benefited from in the post-Thatcher years if it follows essentially Thatcherite policies of low taxes and pro-competitive regulation. Obviously, Thatcherism 2.0 will have to be updated from the original version. Thatcher 1.0 was about defeating inflation, defanging trade unions and privatisation. The modernised version should focus more on the consumer and place more emphasis on competition policy, on promoting supply-side policies and on public sector reform (other than privatisation, Mrs. Thatcher decided that public sector reform was a step too far and compromised by letting the sector live on short rations).
The nearest equivalent to what I’m suggesting were the reforms introduced by the Australian Labour Party, promoted by Paul Keating. Its supply-side reform policies have boosted GDP growth by about 1% per annum since the reforms were introduced 25 years ago. Now Australia has the second lowest share of public spending in the OECD (Switzerland has the lowest) and a growth record to envy. New Zealand, also under its Labour Party, did something similar and boosted growth by nearly as much. Singapore, also under a nominal Socialist, Lee Kuan Yew, pursued essentially similar policies and is now one of the richest countries in the world.
There is economic debate about whether slow growth is inherently unstable. If not, we face a world where people, on average, don’t see improvements in standards of living. If so, we possibly also face frequent economic collapses. I’m in the slow-but-stable growth camp, but the Telegraph has recently suggested that we might become the new Argentina as battles over shares of a fixed or possibly even declining cake become destabilising.
The best way to avoid this risk is to adopt policies that would prevent it. We are now looking out for a Labour government after the next election, which needs economic growth to make its policies work. Sir Keir Starmer rather fluffed his interview with Victoria Derbyshire when she asked him how he was going to get this growth, and he didn’t appear to have any very clear ideas, but the examples of past Labour governments in other countries suggest that it is not impossible for left-wing parties to adopt policies that generate faster growth.
If we don’t get this, our living standards, at best, may have just about peaked, and generations will no longer expect to live better than their parents. But it might even be worse than that…
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