End of the decade: To what degree was Britain’s strong economic performance over most of the last decade, relative to other major developed economies, an illusion? What has been the most surprising economic event or trend of the past decade? What do you think will surprise others in the decade to come?
Published: January 4 2010 04:22 | Last updated: January 4 2010 04:22
The following economists’ answers appear in no particular order.
Dr Tim Leunig, London School of Economics
Almost all of Britain’s strong economic performance is real (whatever Martin Weale may say!). Britain is better educated, and we have made significant progress in moving away from sectors in which we have little competitive advantage into sectors in which we do. Our labour markets are in many ways superb – look how little unemployment has risen, a tribute to how workers “get it”.
At one level the most surprising event has been the crash, but for me the surprising thing is that growth could be negative to the extent that it has been with such small employment effects.
In ten years time we will look back and wonder about the suggestions made circa 2009. Some said it was the end of capitalism, and it wasn’t. Even sane people like Adair Turner said that we should cut back on finance on the grounds that most people buying it don’t get good value for money. (Does the French equivalent of Adair Turner say that France should cut its profitable champagne business on the grounds that more people who drink it can’t tell it from Cava, and therefore don’t get good value for money?)
Patrick Minford, Cardiff Business School
No; UK performance was based on solid services growth, consumer spending was in line with GDP more or less. Banking/financial services remain a key part of UK comparative advantage and remain a growth point worldwide, crisis apart, as markets resume trend towards ‘completeness’.
Capitalism is necessarily crisis-prone since it permits decentralised agents to invest in ‘trends’ that are highly uncertain; they are ‘random walks’.
The current crisis involved banks as did the ‘roaring 20s’ in the US because the productivity growth of the last decade and a half was sustained and strong, thus sucking banks in.
No crisis is predictable by definition. That is why this one was not predicted in general and why I cannot tell you what/when the next one will be!
George Magnus, UBS
It was an illusion to think boom and bust had been terminated when we were running a large structural fiscal deficit at the top of the boom, and when 60 per cent of our GDP growth was sourced to the bloated financial services and housing sectors. We weren’t alone, but the most brazen example. The most surprising event in the West was surely the near collapse of the financial system, after a decade of official and regulatory neglect and bravado. Elsewhere, it was the unprecedented trendline in China’s economy, and sneaking up behind, India. In the next decade, the next surprises are likely to include a recession in China, India’s demographic and economic catch-up, the re-awakening of America’s technological prowess, and decision-time for the Euro Area regarding fiscal transfers and political integrity.
Paul Mortimer-Lee, BNP Paribas
Britain’s better than competitors’ performance in the first half of the last decade was pretty solid. For the last five years it has been anything but that. To too great a degree, out performance was based on ephemeral and unsustainable demand side forces rather than the durable supply side improvement that can be the only lasting basis of out-performance. The main contributor to the mirage was public policy. First was a monetary policy regime that has big holes in the framework; second there was a very poor implementation of the regime by the Bank of England. Finally, fiscal policy was a disaster.
The monetary policy framework of inflation targeting pretty much takes for granted that all is well as long as inflation remains under control. The problem is that if the monetary policy inflation target is credible inflation tells us nothing about whether monetary policy is appropriate or not – the mistakes all show up elsewhere, for example in leverage, asset prices and the growth of money and credit. All these things the Bank of England largely ignored or downplayed.
Second, even within the context of inflation targeting, monetary policy was too soft. From January 2005 to date inflation has been at or below the 2 per cent target in 19 out of 58 months: 11 of those were either at the very start of the period or at the very end. From June 2005 to June 2009, inflation was at or below target only 8 out of 48 months. Even in the UK’s exam marking system, getting the answer right 17 per cent of the time does not count as a pass mark. Real interest rates were too low for too long and the result was an unsustainable boom in house prices and domestic demand for which the BoE must take a great deal of the blame.
An unsustainable boom in domestic demand meant that the tax revenues were flowing freely. Responsible fiscal policy would have moved the fiscal accounts into surplus and would have potted up funds for a rainy day. In fact, was what happened was that Gordon Brown did the best possible imitation of pools winner Viv Nicholson: “spend, spend, spend” was the byword. Public sector employment mushroomed and the public finances slipped into a deep structural deficit. The fiscal rules were bent; the goalposts were frequently moved to make irresponsible fiscal policy look responsible. It had to end in disaster and it has. The fiscal black hole now facing us is not mostly cyclical, it is mostly structural and is the result of the government engaging in the self delusion that credit financed boom times can last forever.
The most surprising trend of the last decade was that central banks and governments deluded themselves that massive global imbalances and an excess of savings in emerging markets could be more or less permanently offset by creating excess demand in the west. They looked only at flow equilibrium and forgot that demand can collapse under the weight of too much debt.
The single most surprising event – not to mention costly in dollars, lost output and jobs – was when Hank Paulson put the gun to the head of the financial system and pulled the trigger with the bullet labelled “Lehman” in the chamber.
What will surprise others in the years to come?
• how appalling is the UK’s economic condition
• the degree of pain that has to be suffered to put fiscal policies back on track
• how high will be the prospective retirement age
• the almost inevitable sovereign debt crisis in the west
• how low inflation goes in the next few years in the west
• how many economies turn Japanese
• how globally unimportant as economic powers will European countries be seen to be
• how high oil prices go
Ross Walker, Royal Bank of Scotland
The combination, over the last cycle, of an expansionary fiscal stance and an environment of ultra-abundant/artificially cheap credit combined to exaggerate the UK’s economic performance (both relative to other economies and historical trends). Depictions of the economy are always prone to hyperbole, both on the upside and the downside. The UK was, is and will remain a mediocre economic performer. It is less that the UK is about to move to a drastically lower trend rate of growth, more that economic reality is reasserting itself – trend GDP is probably closer to 2 per cent than 2.75 per cent.
The biggest surprise was obviously the scale of the financial meltdown. Economic policy frameworks, like political careers, usually end in failure – policy regimes emerge in response to previous problems and are eventually swamped by new events. The blinkered approach of narrow (CPI/RPIX) inflation targeting appears to have suffered the same fate (though some central banks remain reluctant to accept the contribution policy error made to this crisis). Greater monetary policy discretion, with a wider focus on credit and financial variables, augmented by a new ‘macro-prudential’ regulatory framework is the main challenge.
Peter Dixon, Commerzbank
There is a popular view in parts of Europe that the UK’s growth over the past decade was debt fuelled, that the economic debate was focused only on house prices and that the economy produces nothing of value other than financial services. There is thus an element of schadenfreude in the debate. There is certainly a danger is that the UK has squandered part of the legacy of the 1980s reforms in a consumption binge which will require dramatic cutbacks in spending/higher taxation, which will make the UK a less attractive business location and reduce the relative performance of the UK vis-à-vis the euro zone. Indeed, we have long warned that a debt fuelled surge in growth – as engaged in by households – was merely borrowing against future income and to that extent, part of the strength of the UK’s economic performance was illusory. But so long as high taxes do not act as a disincentive, the UK (i.e. London) is still a better bet to attract high quality human capital compared to other European locations which may help the trend growth rate to rebound more quickly. Unlike the late 1970s, many of the reforms needed to allow the economy to respond in a flexible manner to changed conditions have already been put in place, and although the next decade may be a slower haul than we have become used to, the situation in 10 years time may be rather brighter than it currently appears. There is a tendency to see only the downside after a major recession – look at the plethora of titles published in the US in the early-1990s or in Germany in the early-2000s about how the economic outlook will be grim forever. The only thing I will predict about the next decade is that it will probably turn out very different from any prediction I can make today.
Chris Saunders, adviser to Vince Cable
A huge amount of the UK’s growth in the last decade has been on the basis of increased levels of debt and booming property prices, neither of these are a recipe for sustainable growth. It is critical that the UK finds new industries if it is not to enter a malaise.
John Muellbauer, Oxford University
What has been the most surprising economic event or trend of the past decade? The biggest surprise has been the extent of the ramifications of the crisis that began with US sub-prime. This exposed a whole range of fundamental weaknesses in the global economy.
What do you think will surprise others in the decade to come? Climate change will probably generate the biggest surprises and the biggest changes in policy and technology, as the flat-earthers are contradicted more and more by increasingly alarming trends in nature.
Giles Wilkes, Centreforum
I do NOT believe that Britain’s growth was a mirage. Once the whole 1992-2012 period is taken into account, Britain will have easily outpaced its Continental rivals. You cannot employ extra millions on a mirage, and financial services are a valuable activity, in general. Furthermore, they are only 8 per cent of the economy, and only half of that is the City. If I was to pick a future surprise, I would go with Edward Chancellor’s recent warning in the FT that a great deal of its recent activity looks Dubai-esque. China’s growth model will ultimately need to be changed, and the transition will not be easy. Predicting when or how this will emerge as a threat is even more difficult.
The most surprising event of the last decade: I choose the election of Barack Obama, even above the financial crisis. Who would have thought that someone denied entry to the 2002 Democratic convention could lead the free world six years later?
David B Smith, University of Derby
Britain’s strong performance partly reflected the ‘crowding in’ benefits of the tight fiscal discipline of the 1997-2000 ‘Prudence’ period, and also the fiscal stabilisation carried out by the Conservatives after ERM withdrawal in 1992. As a small open economy, Britain also benefited from the benign global backdrop and the rapid growth of world trade. The two pluses that Britain has had have been its openness to immigration and its relatively high level of social freedom, which have made it an attractive place in which to be based. These benefits have now been outweighed by the loss of economic freedom caused by Labour’s tax, spend, and regulate policies. It was indeed an illusion.
The most surprising event of the past decade was not the rise of China but the fact that China has tried to behave like an established ‘conservative’ power in its foreign relations. This is a relief, because normally rapidly industrialising countries throw their weight around (e.g. Imperial Germany in the 1890s or Britain in the 1850s). One possible surprise could be that China’s growth may start slowing by the end of the decade, just as Japan went from a 10 per cent growth economy in the 1960s and early 1970s to the much slower expansion of recent years. Another surprise could be a collapse in the role of the US dollar as the premier international reserve currency.
Keith Wade, Schroders
The UK’s economic performance did owe much to the banks and the growth of debt, but the underlying driver was an open economy with an attractive political and regulatory system. London has been a symbol of that success. Obviously changes are needed going forward, but as long as the UK maintains that environment the gains will not be illusory. Most surprising event – few foresaw the failure of the banks and none got the timing right, which certainly meets my definition of a surprise. Barack Obama becoming President was a more pleasant surprise.
John Philpott, Chartered Institute of Personnel and Development
It is clear that the UK was one of the countries at the heart of the Noughties bubble economy. This exaggerated our relative economic performance. However, while the consequences of the bubble bursting will diminish our relative performance and standing for some time the critique of the British version of the Anglo-Saxon model is overdone. UK performance on most of the economic fundamentals is at the very least better than a generation ago and I’m confident that we will look reasonably strong by the end of the coming decade and continue to be a major player in the G20. One of the fundamentals which has clearly improved in the past decade has been the labour market. The structural reforms implemented since the 1980s have given us a low sustainable unemployment rate and productivity growth in the private sector is also better than before. A reasonably open approach to immigration also enabled us to sustain a very high employment rate in the Noughties by international standards without a return of the ‘British disease’ of rampant wage inflation. The Noughties recession is the first in the post second world war period in which the labour market has been pure victim rather than implicated as a causal villain of the piece. Moreover, wage and hours flexibility has enabled us to limit the employment cost of the recession to only around a third of the output cost. While the lagged effect of the recession may result in further job losses before unemployment peaks (probably in summer 2010) the UK’s flexible labour also has the potential to enable a faster fall in unemployment than seen following the recessions of the 1980s and 1990s. Realising that potential, however, will depend critically on demand for labour – which makes it imperative that we get the stance of monetary and fiscal policy right during the course of the recovery.
Karen Ward, HSBC
We never reached a conclusion as to whether the combination of strong growth yet low inflation in the noughties was down to good policy or whether it was simply good luck – due to the disinflationary tailwinds from Asia and temporary immigration which kept a lid on inflation. Over the next few years we might really test this hypothesis. One of the potential surprises might be how persistent inflation is, even if a recovery is fairly lacklustre.
Martin Weale, director, NIESR
The most surprising trend before the crisis was the way in which Britain seemed to have overtaken both Germany and France in income per head. This felt too good to be true because both our neighbours seemed to be much better managed as economies. The crisis has made me think that much of the income from the financial sector arose from capital gains or from charging commissions which allowed people to realise capital gains. Since we normally make a distinction between capital gains and income, activities driven by capital gains should probably not be counted as contributing to income. But I have made no progress in quantifying this.
James Carrick, Legal & General Investment Management
The widening trade deficit was a clear symptom the UK was spending more than it was earning. It was ignored by policymakers because inflation was suppressed because of cheaper imports from depressed emerging economies. The surprise of the last decade was therefore that you could have strong expansion of consumer and public spending without triggering inflation. This might change over the next decade as developing economies overheat and/or revalue their exchange rates, boosting import prices. Given the UK is a small open economy it could surprisingly rebalance quicker than the US.
Dr Oliver Marc Hartwich, The Centre for Independent Studies
Britain’s economic model before the financial crisis was unsustainable. Its economy was more a mirage than a miracle. Built on private debt, public spending, rising house prices and strong inward migration, it simply could not last. The only surprising thing was that most people believed that it would.
Unfortunately, the past decade has turned the United Kingdom into something more akin to the UnitedSovietRepublics of Great Britain and Northern Ireland with the government’s share of GDP just under the 70 per cent mark in some regions.
The economic future for Britain looks grim. It would be a big surprise indeed if it managed to recover quickly. Beyond that, surprises are inherently unpredictable. Having said that, I would watch out for the early signs of sovereign debt crises around the globe.
Samuel Brittan, Financial Times
Not really an illusion. But growth rates per capita tend to converge in medium term.
Dhaval Joshi, RAB Capital
End of decade: Britain’s strong economic performance was a complete illusion. The long period of above trend growth from the mid 1990s to 2008 that Gordon Brown frequently boasted about was simply down to a plunge in the savings rate from 5 per cent in the mid 1990s to an unsustainable -9 per cent in 2007, facilitated by a borrowing boom, which gave UK consumption a massive 14 per cent boost. But if the savings rate is now headed back to 5 per cent, the outlook for the UK economy is a prolonged chill.
The Noughties defining economic characteristic was the sequence of three massive borrowing booms and two intervening busts in the space of just one decade – first, corporates (dot com boom), then households (housing boom) and now governments.
The decade’s mantra was “borrow and spend”; next decade’s might be “save and reduce debt”. So the surprise will be about how low, and how persistently low the numbers are: for growth, inflation, interest rates, and investment returns.
Pierre Cailleteau, Moody’s
A material part of Britain’s economic over-performance has been related to higher leverage. However, the underlying story based on the very high ability to allocate resources flexibly in the economy is probably robust.
One surprising trend has been the fragility of the financial construct – but another, more reassuring surprising trend, has been the exceptional balance-sheet flexibility of governments in the midst of the crisis.
The surprise, good or bad, in the next decade will come from the ability of advanced societies to cope with lower growth and rethink the social contract between individuals and the state. That will be a test of cohesiveness and fortitude.
John Hawksworth, PricewaterhouseCoopers
I think some of the UK’s relative success was solidly based, for example in terms of our relatively flexible labour market and strong clusters of expertise in financial and business/creative services. But apparent success was exaggerated by high levels of indebtedness and an illusion of increased wealth due to rising house prices. UK may well underperform other major economies in the next decade due to the need to pay back public and private debt.
The most surprising event has been the speed of the rise of the China and other emerging economies. The fact that China is now the second most important economy in the world on many measures would not have been predicted by many back in 1999.
It may not be all that surprising, but I think there is a good chance that India will overtake China as the fastest-growing large economy by the second half of the next decade and will be seen as increasingly important in political and business circles as a result.
Richard Jeffrey, Cazenove Capital
The illusion from which we have suffered over much of the last decade is that we could determine the requisite policy by reference to one number: inflation. From a relatively balanced position in 1997, this has taken us into an unsustainable position characterised by a high level of excess demand. A policy path that ignored the fact that, for most of the period, domestically generated inflation was running at almost twice the rate of the inflation target, was accommodated by official estimates of the trend growth rate that were substantially too high. The result was a steady rise in the external imbalance; in other words, we spent much of the last decade accommodating demand overheating. Meanwhile, watching public sector finances has been akin to watching a train crash in slow motion. The irony is that although we now find ourselves saddled by huge and still rising levels of debt and there is evidence that we have done little to contain excess demand, the achieved level of GDP growth has been comparatively unexciting – just 2.6 per cent per annum between 1999 and 2008 and only 2.2 per cent between 2004 and 2008. Meanwhile, as the FT has pointed out recently, the productive base of the economy has become significantly narrower.
The surprise, looking ahead, is a negative one: that it will take at least the first half of the next decade to rectify the problems that have built up over the past 10 years. In essence, the borrowing that took place in the period leading up to the financial crisis and recession was ‘borrowing’ from future growth; unfortunately, the cost of servicing that borrowing will prove to be exceptionally high.
Ruth Lea, economic adviser, Arbuthnot Banking Group
Britain’s relative strong economic performance was to some extent an illusion – bolstered by unsustainable public spending increases, a credit binge and a housing boom. The economy will pay the price for the next decade. Large-scale immigration masked the poor productivity performance. The most surprising “event” was the continuing powering ahead of China and, to a lesser extent, India – though some will not have been so surprised. Concerning the decade to come, the US’s relative position will probably weaken further – but whether this will surprise people I don’t know. We are witnessing the shifting of the tectonic plates of the global economy.
Howard Archer, IHS Global Insight
I am not sure I would call it an illusion. But it was certainly built on shaky foundations. The strong economic performance was far too reliant on the UK financial services sector. The dependence was two-fold. First, the sector oversaw a decade of very loose credit conditions, helping consumer spending growth to outpace real household disposable income growth in the second half of the decade. This helped to underpin rising housing equity, soaring consumer debt levels and a steady fall in household savings rate, hardly a sustainable model.
One of the most surprising UK economic events of the past decade was the length and extent of the housing market upturn.
I would love to think that the surprise for the next decade is that the UK economy rebalances quickly and performs way above current expectations – but I have my doubts.
Colin Ellis, Daiwa Securities
I don’t think the macroeconomic performance was an illusion – low inflation and steady GDP growth was genuine, what we missed were the problems building up as leverage climbed in the banking sector (leading to a repricing of risk etc). I still think trend growth will be 2.5 per cent and inflation can be kept close to target once we get through all this (though obviously getting through it will take some time). The most surprising economic event of the past decade has to be the biggest global recession in most people’s lifetimes – though for a single shocking day, Lehman’s collapse will still take some beating, I will remember that for the rest of my life. I think when people look back at us in the future, they will wonder why, if policymakers were warning about the mis-pricing of risk and over-leverage in the years before the crisis hit, we didn’t do anything about it before it blew up in our faces.
Stewart Robertson, Aviva Investors
Not an illusion, but perhaps a bit bubbly. Most surprising? If you had said 2 or 3 years ago that we would have 0.5 per cent base rates and a 12 per cent of GDP budget deficit, (and heading to 80 per cent to 100 per cent debt to GDP) you’d have been laughed at. Surprise to come? Who knows! Perhaps that new jobs will eventually be created and that we grow again. Perhaps that interest rates are lower for longer. A nation leaving the Eurozone? I don’t think the full impact of the growing importance of Asia on the world stage has yet been appreciated. Back in the 1200-1500 period, Asia is estimated to have accounted for up to 75 per cent of world GDP. Probably heading back that way, but it will take more than a decade!
Ian Mccafferty, CBI
The “nice” decade was driven by a combination of the emergence as global consumers of a significant part of the world’s population and disinflationary conditions allowing a long period of easy money. To that extent, it was not illusory, though it will probably turn out to have been unique, in that the confluence of factors is unlikely to re-emerge so strongly in the foreseeable future. The UK used this period to generate rapid growth in an industry in which it has a clear global comparative advantage – financial services – providing benefit to both GDP and the public finances over the period. With the end of the nice decade, and the credit crunch, not all of those gains have proven sustainable, but the benefits to the economy as a whole were real.
In terms of surprises: event – the sheer pace of the contraction in world trade in the six months following the Lehmans collapse; trend – the marked change in the nature of the (private sector) labour market in the UK that has resulted from the success in stabilising and controlling of inflation under an independent central bank.
Next decade: the success with which the UK will develop new industries and technologies as sources of growth to rebalance its areas of comparative advantage. We may be a mature economy, but we have a good number of existing and emerging success stories unrelated to financial services, which will help drive growth over the coming decade.
Philip Booth, Institute of Economic Affairs
In the mid-later part of the decade, the strong economic performance was sustained by a transfer of resources into the public sector (the impact of which on the private sector was lagged) and by loose monetary policy. In that sense, the strong performance was an illusion. The most surprising trend has perhaps been the way in which real wages responded to the crash (by falling in many sectors) this has limited the impact of the crash on unemployment.
Tony Dolphin, Institute for Public Policy Research
It was an illusion because it was built on an unsustainable accumulation of household debt. The best that could have happened was that debt stopped increasing (relative to incomes/GDP) and our economic performance reverted to mundane. The worst that could happen … well it has happened. There have been lots of surprises in the last 10 years. Among the most striking have been the extent to which China (and other economies) have been prepared to transfer capital to the west, particularly to the US, given the almost inevitability that it will earn poor/negative returns and the fact we managed to squeeze two major asset price bubbles and busts into one decade – a trend and an occurrence that were not unrelated.
Since everyone seems now to be convinced that China is going to grow at an annual rate of 8-10 per cent for the next decade (at least) and has – much to Gordon Brown’s envy no doubt – really abolished the economic cycle, a big surprise in the decade to come would be a period of weak growth in China. I can’t think why this should happen, but then it would not be a surprise if I could.
Phil Thornton, Clarity Economics
Strong UK growth was built on debt, both private and public, and excessively on one sector – financial services. The lack of long-term sustainable sources of wealth generation left it vulnerable to a shock, so that sense it was illusory and much of that wealth has gone for good.
Big surprise? The consensus around the Great Moderation as being the end of economic history in some way. The lack of serious debate – with the honourable exceptions of Bill White at BIS and Andrew Smithers – perhaps allowed policymakers to ignore the threats of a long tail/black swan event for too long. Too much consensus can be bad for economic health.
Geoffrey Dicks, Novus Capital Markets
Getting inflation down and keeping it down was not an illusion. To the extent that this enabled the economy to grow steadily for 17-odd years, this was no illusion either. I may still be in denial myself over the events of the last two years but I don’t think there was anything inevitable about what happened as a result of the credit crunch (which I still think was visited on us by the US rather than home-grown.
The most surprising event (apart from the spectacular way it ended) was that the UK grew for those 17-odd years – if anyone had stood up in 1992 and said that this would happen, they would have been laughed out of court. Maybe we are where we were in 1992 all over again and another decade of growth is about to start.
The least surprising event is that hubris eventually is visited on corporate bosses who think they can do nothing wrong and who brook no criticism – there are countless examples of this throughout corporate history.
Douglas McWilliams, chief executive, CEBR
The Treasury has been catastrophically overoptimistic about long term tax revenues based on bizarre growth extrapolations – for example assuming that east European immigrants would continue to flood in at the pace that they did when admitted to the EU and on assuming a permanent bull market. CEBR has argued for many years that the underlying rate of productivity growth in the UK was well below 2 per cent and that spending growth needed to be based on cautious assumptions.
I was personally most surprised by the persistence of the financial boom beyond about 2005 – the last two years of this made the scale of the necessary correction much bigger than would otherwise have been the case. I was also surprised by the fact that the bankers decided suddenly not to lend to each other. Finally, I should not have been, but was surprised that globalization had left much more inventory in the world economy than I had previously expected, which made the scale of the 2008/09 worldwide inventory correction much bigger than had previously seemed likely.
I suspect that many people in the decades to come will be surprised by how little pain (except for the providers of services) will result from public sector cutbacks – many of the things cut back will turn out not to have been necessary in the first place.
Jonathan Haskel, Imperial College Business School
In hindsight, the banking crisis, since no-one saw it coming (except Nouriel Roubini). strong performance only very partly an illusion since in practice financial services accounts for less of GDP then people think, especially since it was so badly mis-measured for most of the period.
Michael Dicks, Barclays Wealth
Perhaps two-thirds illusion and one-third reality? The most surprising trend is China’s performance – and the fact that almost everyone takes it as a given, unquestioningly. So, perhaps it will also be the big surprise in the next decade too? So might the presumption be that volatility will remain fairly low. Usually a bout of economic volatility, as has happened in recent years, sparks a bout of political volatility – and the resultant tensions create new uncertainties and costs.
George Buckley, Deutsche Bank
The reason that the Bank of England was able to grow the economy at such strong rates without generating inflation over the past decade (1997-2007) was because of goods price deflation. With many goods being imported, there was little the BoE could do to influence goods prices. So in order to achieve overall inflation at 2 per cent it had to run the domestic economy more quickly than otherwise to raise domestically generated inflation. This then offset goods price deflation to keep overall inflation at 2 per cent.
Now goods prices are rising again. When the negative impact of high levels of spare capacity eventually wanes, in order to produce overall inflation of 2 per cent in the future we will need to see a less favourable combination of interest rates and economic growth. In other words, the next decade is payback for a period of excessive growth over the past 10 years.
Ray Barrell, NIESR
A boom fuelled by loose fiscal policy and excessive consumer borrowing financed by a housing market bubble induced strong growth in the UK for most of the last decade. However, there is evidence that increased levels of training and education have raised our growth rate by a quarter to a half a per cent as compared to our European neighbours. The most unexpected event, apart form the crisis, was the scale of New Member States migration to the UK. The number expected to leave was OK, it was just that we did not expect to be the only destination. This helped stave off the inflationary consequences of loose fiscal policy and excessive borrowing.
Andrew Hilton, Centre for the Study of Financial Innovation
The tragedy of this crisis for the UK is that it has given open markets, competition and limited government a bad name. We had it broadly right – though I would still like to smack DeAnne Julius for convincing us all that manufacturing is not “special”. Maybe there was some truth in what she (and Bob Lawrence) wrote – but “tradeables” are special. And we have ignored them.
Martin Gahbauer, Nationwide Building Society
There is no hiding the fact that Britain’s economic expansion during this decade has depended at least in part on a large expansion of credit to households and a structural increase in public sector borrowing that the markets were willing to tolerate and finance at low interest rates. These trends were pushed to the limit and the next few years will be pay back time.
Nick Bosanquet, Reform
Britain’s growth performance mainly due to debt financed boom and to the rise in public spending.
Most surprising economic event of last decade has been rise in public expenditure – from £418.8bn in 1997-98 to £627.8bn in 2008-09 a rise of 49.9 per cent from 38.2 per cent to 43.8 per cent of GDP without thorough reform. Record very different from Australian Labour and Clinton administration in US ... UK has had the Last Hurrah of tartan Stalinism.
NHS outcomes could have been improved for £30bn less by more use of competition and choice.
Surprise will be low level of UK growth over next decade. Government and household spending will not be driving GDP growth as up to 2008 and much investment spending will be offshore.
Nick Barr, London School of Economics
At the start of the decade raising retirement age was not a suitable subject for polite society, and even student loans, though they had been in place for 10 years, were regarded as rather dodgy. Today retirement age is part of policy discussion and, though tuition fees remain controversial, some sort of contribution by graduates is taken for granted.
By the 2020, people will be surprised that raising retirement age and charging graduate contributions were ever controversial.
Brian Hilliard, Societe Generale
It was certainly exaggerated by the growth of financial assets as a share of GDP but much of the growth was a gift from globalisation which allowed the BoE to run relatively loose monetary policy.
There can only be one choice for the surprise – the shock into near Depression – as we all under-estimated the mis-pricing of risk and the insidious geographical dispersal of those risks around the globe.
The coming surprise is likely to be the long duration of slow growth in the west after the initial post-recession bounce
Stephen King, HSBC
Trend growth in the UK will be lower, there will be a persistent fiscal squeeze, there will be no old-fashioned “crowding-in” benefits and we’ll be wondering what on earth happened. We are facing a period of political introspection triggered by a failure to understand properly the ultimate causes of the crisis.
Peter Spencer, Ernst & Young Item Club
To the extent that this was based upon international borrowing it artificially propped up UK living standards – these would otherwise have come under pressure from competition from the East. However, I believe that the UK’s supply side performance, and in particular the flexibility of the labour market was impressive. Inflation and unemployment remained remarkably low, and are likely to remain so going into the next decade.
The seizure of markets in the credit crunch. It was obvious to many people that the imbalances and the expansion were unsustainable. I think most of us thought in terms of a gradual rebalancing as the debts built up and house prices became unaffordable and so on, gradually applying the brakes. We also saw a fall in the dollar as part of a general adjustment. Economists usually expect things to turn round gradually, moving in a cyclical way. However, this time the international banking markets simply froze. So what we got was more like a car crash.
Provided that the global imbalances start to unwind we will see a return to the low volatility of the ‘Great Moderation’. That may seem surprising but it is actually an easy call. That is because this is the normal state of affairs – the high volatility of the 1960, 1970s and 1980s was an aberration caused by high rates of inflation. Just as Milton Friedman predicted in his 1977 Nobel acceptance speech, the low volatility of the early post-war years returned as inflation came down. The only problem was that financial deregulation and low volatility led borrowers and lenders to expand balance sheets excessively. With inflation remaining very low, we only have to resist that temptation and all will be well. Future econometricians will then see the recent crisis as a couple of massive negative inflation and output shocks (in Q3 and Q4 2008) in an otherwise benign macroeconomic environment.
Andrew Scott, London Business School
Britain has at the top end a skilled and flexible workforce. Combine that with low tax and a light regulatory environment and you get economic success. Skilled and flexible workers can shift out of finance into other areas and don’t have to stay in finance. To that degree there was nothing illusory about Britain’s relatively strong economic performance. However with an increase in global regulation the products the UK financial sector produces will be less in demand and with low taxes and a light regulatory touch ceasing to be such an attractor there will need to be a period of transition whilst the financial sector grows more slowly and resources shift into other parts of the UK economy. The more skilled and flexible these workers are the more swiftly that transition will occur
John Van Reenen, Centre for Economic Performance, LSE
I think that people have been too negative about the post 1997 period under the current doom and gloom. There was a long period of sustained growth and low unemployment. This was underpinned by productivity growth that was strong over this period relative to other main OECD nations, keeping up with the US productivity acceleration and addressing the UK’s long-run productivity gap. And this all remains true if you drop finance from the picture.
Britain enjoyed a massive increase in the proportion of young people going to college, building our human capital and a policy framework that broadly kept to open and flexible markets (bolstered by tougher measures to improve product marker competition).
At the beginning of the decade as the Internet bubble burst, we thought the income distribution might stabilize in the US and UK. In fact, the proportion of income going to the very rich (e.g. top 1 per cent) increased tremendously over the last decade, even as inequality in the bottom 50 per cent of the distribution stabilized or even narrowed. In many other countries where inequality had not risen in the 1980s (e.g. Scandinavia and Germany) inequality has also been rising.
Melanie Baker, Morgan Stanley
I don’t think it was an illusion, but low volatility in growth and inflation meant that the ground for a crisis was fertile. For example, households likely took on more debt thinking that their incomes were now less volatile and businesses likely took on higher levels of leverage that they otherwise would have done.
Peter Warburton, Economic Perspectives
Sadly, most of it was illusion, based on increased economic leverage and an accompanying erosion of the national saving rate. The surprise was the length of time it took for the reckless over-expansion of credit to blow up economic performance and the breathtaking audacity of the leading central banks in prolonging the flight from economic reason. In the coming decade, the key surprise will be the return of a high single-digits global inflation rate and the sickening realization that we have to fight this dragon all over again.
Gerard Lyons, Standard Chartered
The lesson of the last decade was not that the UK’s strong growth was an illusion. The lesson was to learn the lessons of previous cycles: the Maudling Boom, the Barber Boom, the Lawson Boom – and now the Brown Boom. All these booms were followed by busts because the authorities were unable to curb excess growth in credit and debt.
One implication of the crisis for the UK – as for the world – is the need to ensure balanced and sustained growth. External deficits matter and large ones cannot be sustained.
Not sure about the most surprising but the most significant has been the emergence of China. It is now a powerful economic force.
The world economy boomed in the last decade and we should not forget that. The world economy grew in size from $31,500bn to $61,000bn.
Surprise in the decade to come? An arc of growth from China to India and then on to Africa, as the centre of global manufacturing shifts to regions with large and growing labour forces, and to economies rich in resources. As I touched on above, the first few decades of this century could be a super growth cycle for the world economy.
Howard Davies, London School of Economics
Much of Britain’s superior performance was attributable to rapid growth in household debt, which could not go on. There was no growth miracle. Productivity growth was unexceptional, and we have not closed the output per hour gap with the US, France and Germany.
One major surprise (to me) has been the lack of convergence within the euro area, with marked shifts in competitiveness between members, whose consequences are now being seen in the crises in Greece (and probably Portugal shortly)
If I knew what the next surprises would be, they wouldn’t be surprises.
Robert Barrie, Credit Suisse
I’m not sure it was an illusion. The economy really was very stable. The problem was that money, credit and asset prices weren’t very stable. It would be good to think that the authorities have learned to take the latter more seriously as a result of recent experience – but beyond the calls for a new macro prudential instrument – I’m not sure that’s the case.
Sushil Wadhwani, Wadhwani Asset Management
Some of the growth in the UK earlier in this decade looks to have been unsustainable, and part of a bubble. Over the past decade, I was astonished that policymakers were so slow to recognise the bubble and do something about it. Indeed, some policymakers were still preaching the merits of securitisation as late as the autumn of 2007 and were telling us that the global banking system was well capitalised as late as January 2008.
Henrik Braconnier, OECD
This is a difficult question. Many other economies in the OECD area also seems to have been affected by a similar “boom and bust”, raising doubts about the long-term potential (think of the car industry, property markets and public finances in general). But these tendencies were a bit more pronounced in the UK due to the large financial sector and a weaker initial structural fiscal position.
The most surprising development must be the inability of the global financial system to handle the financial stress initiated in (largely) US housing markets. This rightly has raised concerns about financial markets stability and changed the game for economic policy (especially monetary and macroprudential policy). A second surprise was the developing world’s resilience (especially China) in the face of the crisis.
Looking forward it is not unlikely that things in terms of expectations on economic policy will revert surprisingly quickly back to normal (just look at the banking sector). It means that policy makers need to address underlying structural issues (Fiscal policy, macroprudential, etc) as quickly as possible.
Diane Coyle, Enlightenment Economics
It wasn’t illusory. The era of liberalisation did increase productivity outside financial services, and even in finance, and high immigration boosted growth as well. It would be regrettable if the backlash against finance – actually extensively but badly regulated – led to a reversal of some of the flexibility so hard won in the UK economy.
The surprises come in an appreciation of what the shape of the economy actually is. The role of finance has been exaggerated – its share of GDP was somewhat higher in the UK than in France or Germany but not massively so. Likewise, the demise of manufacturing is hugely overstated. The UK has highly productive manufacturers in many areas of technology, although seriously hampered by a shortage of suitably skilled UK graduates. The creative sector is bigger than the financial and exports very successfully. I hope we will be surprised by how well some of the unsung heroes can do in the decade ahead, if we stop obsessing about the City.
Alan Budd, Queen’s College Oxford
I don’t think that our strong performance was an illusion. The credit crisis was the most surprising event (to me, at any rate). I think that the future event that surprises others will also surprise me.
Lucrezia Reichlin, London Business School
Probably yes, but this does not mean that the UK will do worse than other developed economies in the future. The success of the Chinese model. That the “lessons from the great crisis of 2008’’.
Trevor Williams, Lloyds TSB
Big surprise of the last decade was that the UK grew for 16 years uninterrupted. That was bound to end, and it was not all debt. It took a global recession and a global financial crisis to end it. Debt played a part in the last decade, but it not just abut that; the UK played to its strengths, and became more flexible as a result. The challenge for the next decade is to one again reinvent itself. A big change would be if the UK became more export oriented after a decade of domestically driven growth. It would also mean that it has proved successful in meeting the challenge posed by the coming decade, of more open markets and even greater globalisation than seen so far.
Gary Styles, Hometrack
It now looks likely that the UK’s underlying performance in the last decade is not dissimilar to previous periods and although average growth has been slightly higher in recent periods, the very long term trends have hardly changed. If anything the structural issues we faced in the early 1990’s are even more pertinent as over reliance on consumer spending growth and personal borrowing remain critical issues. The huge trend decline in our manufacturing, production and export industries only add more complications to any economic remedy for poor trend economic growth.
Most surprising event: Collapse of HBOS and Lehman’s. This has shattered the confidence of consumers, bankers and policymakers alike. We have entered a new world where accepted norms, implicit assumptions and expectations have changed permanently. The genie cannot be put back into the bottle.
What will surprise in the decade to come: How little politicians and policymakers can effectively achieve when economic fundamentals and global markets are against them.
Ian Plenderleith, former Bank of England head of markets
I don’t subscribe to the view that the UK’s performance over the past decade was a flash in the pan: the capacities that drove it are still in place, and much less damaged by this recession than by previous ones.
Biggest surprise of the past decade: two of them – (i) that markets can fail (ie suddenly cease to function) – not new, but we had forgotten that it can happen; and (ii) the market’s failure to price risk properly.
Surprise for the next decade: the next bubble (maybe in the bond market) and the realization that, despite best present intentions, we do not have any really effective instruments to deflate bubbles in advance. Macro-prudential management is one of the big challenges for policy-makers over the next several years.
David Blanchflower, former MPC member
I wouldn’t argue it was an illusion. The UK benefited from having a large financial sector which gave it benefits but then exposed it to greater risk in the face of a financial shock. The optimal size and structure of the financial system, and the optimal amount of regulation and who does it is yet to be determined. But inflation targeting with a single target of the CPI failed and needs to be replaced. Having unemployment as a specific goal of macroeconomic policy also seems important. Unemployment hurts more than inflation.
Andrew Simms, policy director, New Economics Foundation
To a degree all major developed economies have been living beyond there means, both economically and environmentally. A reckoning was inevitable, sooner or later. In one sense we are lucky that the banking system went into crisis before the ecosystems upon which the economy ultimately depends. The taxpayer was there to bail out the banks, whereas nature doesn’t do bail-outs. So, as part of the Anglo-Saxon club that privileges the finance sector, relatively, to a larger degree, Britain ‘s performance was merely more illusory than others. Having clearly warned, in some detail, of both the nature and scale of the banking crisis in our 2003 book,
The Real World Economic Outlook, we cannot, however, say that the banking crisis was a ‘surprising economic event.’
Perhaps the most surprising recent trend in developed economies is the speed with which many people have taken the opportunity of the recession to redefine their lives and goals. Given the opportunity of working less and having more time, people are taking it and enjoying the consequences. For example, in Utah, in the US, where the local municipality put people on a shorter working week, they found that absenteeism went down, morale went up, and they achieved a reduction in greenhouse gas emissions. This perhaps is the future: less work, more fun, less carbon.
Julian LeGrand, London School of Economics
It is not an illusion that Britain’s GNP increased by 50 per cent since 1997. Even in the worst case scenarios, this recession will not put a major dent in that.
Lena Komileva, Tullet Prebon
I guess the most surprising economic trend of the past decade has been the extent to which wholesale market finance has become a major driver of the global economic cycle, alongside traditional bank credit. It’s not surprising that this crisis began with the breakdown of capital and money markets and it is no surprise that signs of the crisis ending emerged with a record-volume capital markets recovery. Yet still, the disrupted link between capital market liquidity and borrowers in the real economy is having an effect on unemployment, house prices, pension values and many other factors affecting everyday life. With hindsight, quantitative monetary policies ought to have been employed as a symmetric policy tool during both booms and busts throughout the past decade.
Jonathan Loynes, Capital Economics
The UK’s strong economic performance over the last decade or so was certainly flattered by the unsustainable buoyancy of the City and the public sector, but it was not entirely an illusion. The economy is in a much better structural shape than it was several decades ago, with a more flexible labour market and a strong international position in certain fast-growing business sectors. So we are not heading back to the 1970s. Still, the UK may well continue to lag behind its major competitors over the next year or so.
The most surprising event of the last decade must surely have been the deepest global recession in modern history. Even those who warned of the dangers, including Capital Economics, were surprised by the severity of the downturn and the associated crisis in the financial sector. Others believed that boom and bust had been eliminated!
In the decade to come, the biggest surprise might be just how rapidly the global economy bounces back – but I doubt it. I think it is more likely to be just how long the legacy lasts.
Bridget Rosewell, Volterra
To the extent that it was bought with taxation and debt (both public and private) it was indeed an illusion which has come home to rood. The most surprising economic event was the willingness of the US to engage in quasi public ownership of financial institutions. In the decade to come, many may be surprised by the resilience of capitalism and its capacity to withstand shocks.
Ben Broadbent, Goldman Sachs
It was not an illusion – but then the relative strength wasn’t that marked either. Per capita GDP has been slowly converging with that in other parts of Europe for the past 25-30 years and that gap didn’t close any faster over the last decade than over the previous decade. The surprising event has been (until recently) the strength of the currency, although that – we believe – was in part the result of the dramatic growth in government consumption. I think the decade to come – or at least the first few years of it – will look a bit like the mid-1990s. A contraction in the public sector, outperformance by those bits of the economy sensitive to the exchange rate and reasonably good rates of economic growth overall. Otherwise, most of the surprises (one hopes) will be outside the UK, and probably outside the developed world altogether.
Brian Coulton, Fitch Ratings
UK growth was undoubtedly ‘pumped up’ by the global credit boom in the middle decade. You need look no further than the speed with which household savings have risen through the recession to understand that prior trends in consumption – fuelled by house price gains – were unsustainable. But despite these cyclical excesses there have also been long term fundamental improvements in the flexibility of the economy and in the monetary policy framework since the 1970s and 1980s which should ultimately render the economy more robust and resilient over the medium term.
One of the more surprising developments through this recession has been the mild increase in unemployment – whether this is truly a reflection of greater labour market flexibility or it is just a matter of time before unemployment catches up with the economy will be very interesting to see.
Michael Saunders, Citi
The UK did have genuine economic advantages at the start of the decade: relative strength in knowledge intensive services, flexible labour markets, good credit availability, sound fiscal position and low tax rates, plus openness to foreign direct investment. These made the UK the country of choice for global firms and global talent, leading to a period of strong productivity growth and higher potential growth. But policymakers tolerated and encouraged by their actions a massive surge in private and public debt and spending that has now left the economy enfeebled. Moreover, the UK’s advantages in labour markets, market openness, favourable tax system, and public finances are now being lost through policy neglect and pre election political gestures. It will take many many years of hard work and hard policy choices if the UK is to regain its top tier global rank of the middle of the decade.
Peter Westaway, Nomura
No, I don’t think this was an illusion. Even after the financial crisis, financial services will continue to play a significant role in the growth and development of the UK as a financial centre, even after Mr Darling’s “supertax”. And it is a fallacy to characterise UK growth as reliant on booming consumer spending. Certainly the share of domestic demand has increased in the last decade, but the exchange rate has been strong as a consequence and net trade and manufacturing has suffered. Looking forward, the economy will rebalance, but this won’t mean that medium-term growth is slower. Rather, UK growth will continue to be largely determined by continuing productivity improvements spurred on by an increasingly flexible labour and product markets; the benign performance of the labour market during this downturn provides evidence of this.
Perhaps the most surprising event of the last decade is how a consensus could exist on the unsustainability of house prices (residential and commercial) in the UK but most notably the US, and this could sit alongside a financial system which could collapse once same house prices returned towards those fundamentals.
Another surprise is the return of financial economics and economics of banking. For a while, macroeconomics had been dominated by a view that interest rates (possibly plus or minus a spread) contained all the relevant information about monetary conditions and the world could be explained by efficient markets and optimising agents. We all knew that view was too simplistic but no-one said it very loudly. Now we all know different. Danger going forward is that the pendulum swings too far the other way and economist return to ad-hoc theorising.
New surprises? Could this be the lost decade for the world economy? Despite our best attempts, we really don’t have an accurate idea on how powerful deleveraging forces are. If this downside risk were to materialise, and if we reach a point where the ability or willingness of governments to loosen fiscal policy simply reaches its limits, then the world could remain at or near the zero interest rate bound for much longer than is currently priced in.
The other surprise would be a world where a new system of macroprudential surveillance is agreed upon and the credit cycle is abolished for ever. This is what policymakers are striving towards. But previous generations have tried and failed before to tame the forces of optimism and pessimism. Perhaps this time, we’ll get it right!?
Charles Goodhart, former MPC member
Less than most now think (the UK will recover better than eurozone or Japan). What has been the most surprising economic event or trend of the past decade? The rise in income inequality. What do you think will surprise others in the decade to come? Possibly a fall in income inequality?
Philip Shaw, Investec
Yes. At least it was certainly flattered by the increase in public expenditure and by strong consumer spending growth over most of the period.
The way that supposedly well capitalised financial institutions were ravaged by the credit crisis.
Not sure. More small banks and building societies opening and some return to “traditional” banking? A waning of the “west’s” economic power being mirrored in their relative political decline?
Danny Gabay, Fathom Consulting
That is a very good but difficult set of questions. We would have to say that far more of the past decade’s performance now looks like luck or illusion than genuine improvement – even our much vaunted flexible labour market appears o be more spin than reality. We still believe that an independent inflation-targeting central bank is the right institution for economic management. But its practise has been a let down. In particular, the inability to see the linkages between asset markets, debt and the economy was as big a policy error as the UK has endured over the past century. That said, compared to the medium term fiscal ‘rules’, monetary policy has been a real success. And as for the push for stronger productivity growth ...
The most surprising trend over the past decade must be China’s emergence, as well as India and Brazil. A close second must be the build up of household debt alongside housing market bubbles, and the way it was allowed to happen, again.
In the decade to come we may find out whether China’s emergence is for real or yet another illusion – though Japan’s and the Asian miracle took four decades to unravel. Meanwhile British consumers will probably spend a good deal of the first half of the decade paying back the debts they accumulated during the previous one, against a background of persistent unemployment. But hopefully, they will spend the second half living within the means afforded by the country’s actual as opposed to its imagined trend rate of growth, same goes for the government.
Finally, a wish/hope. We hope that the next decade does not bring forth yet another ‘new new’ idea. We could do with some old fashioned, boring but affordable growth.
An economic adviser to the Conservative Party
To a very large degree, especially since about 2003. The most surprising thing was that everyone believed the myth for so long when in retrospect so many dials were flashing red. In the decade to come people will be surprised at how persistent the legacy of the crisis remains.
James Knightley, ING
UK trend growth has been around 3 per cent, but I think we will see it being closer to 2 per cent for the next decade for the reasons mention above in Q1
For me one of the most surprising has been the failure of emerging markets to significantly ramp up their domestic demand (or certainly not as much as I had thought possible). Maybe this decade will see that happen.
Mark Cliffe, chief economist, ING
The biggest surprise of the decade was the boom and bust in structured credit, which precipitated the biggest financial crisis since the Great Depression. Our thinking about economic theory, practice and policy has been transformed as a result. Among many things that have been overturned is the naïve faith in efficient markets and the notion that risk can be managed.
On possible surprises for the coming decade, the structural damage in the wake of the financial crisis, coupled with excessively cautious regulation presents obvious downside risks. More positive surprises could be:
1) Outperformance by the US economy
2) Major technological breakthroughs in green technology and health care may spur unexpectedly strong growth later in the coming decade
3) Cyclical upswing and the use of green taxes, especially in the US, might lead to unexpectedly rapid falls in budget deficits
4) Financial services grow unexpectedly rapidly, especially in the emerging world
Sir John Gieve, chairman Vocalink and former deputy governor of the Bank of England
I think the UK’s performance genuinely was pretty good relative to the US, Japan and EU over the last decade and, despite the hits of the last two years, it is well placed to do relatively well in the next decade too. Obviously the biggest surprise was the financial collapse of 2007-09 and the way that the credit markets which had been designed to hedge risk had created powerful new channels of contagion in a downswing.
Re: The United Kingdom Elections 2010
Originally Posted by Furunculus
using your own link i see a different picture:
Reply With Quote
- Horseman of the 
Re: The United Kingdom Elections 2010
Bookmarks