I wouldn’t describe Bill Bailey as one of my favourite comedians, but I really do rate his turn of phrase. Following an especially hollow exchange with the audience at one of his gigs, he suggested that the interaction had been ‘like a long walk across a windy beach only to find the café had closed’. Oftentimes, that’s how I feel when I’m reading the transcript from a speech by one or more members of the Monetary Policy Committee. Very occasionally though, I find an extract that stirs a stronger emotion somewhere inside me.
During a talk at the Resolution Foundation a couple of days ago, Michael Saunders made the following observations…
‘The UK economy is starting to face increasing challenges from demographic trends, which seem likely to cause persistently low workforce growth in coming years and (all else equal) limit potential growth to well below even the modest post-GFC pace’.
Here we have a member of the MPC that has consistently dissented to the upside on interest rate policy, laying out his expectations for painfully slow growth in the years ahead of us. I’ll be generous and admit that I can see why he has voted the way he has. Afterall, the MPC is tasked with maintaining inflation at 2%, and while there are some platitudinous mentions of growth and employment there is little doubt which of those takes precedence. But I can’t help feeling a little frustrated. Here’s why…
The British economy expanded at an inflation-adjusted geometric rate of 2.6% between 1955 and the Great Financial Crisis (GFC) in 2008. The ‘average’ calendar year expansion amounts to 2.7%, fluctuating between a high of 6.5% and a low of -2.5%.
Sticking with the geometric measure, it has to be said that a growth rate in the region of 2.6% is not at all thrilling. Our American cousins secured an increase of 3.3% over the same period and that extra 0.7% really adds up. The point I want to make is that we should feel dissatisfied with 2.6%.
Now let’s take a look at the same growth rate over the period since the GFC, beginning in the first quarter of 2009 and ending in the first quarter of this year. Over that period the British economy has expanded by a paltry 1.6% per annum. The US economy, for comparison, has grown at an ever-so-slightly-less-disappointing rate of 2.0%.
Those figures are awful. Yet somehow we have become accustomed to them; we don’t grumble, and we don’t call for improvement.
As an aside and what with all the Brexit brouhaha, you’d be forgiven for thinking this is a problem which is peculiar to the UK. I’ve already demonstrated similarly sluggish growth in the US but take a look at the numbers for Canada, Germany, France, Japan and poor old Italy too...
Now, Michael Saunders is predicting rates of growth over coming years which will fall ‘well below’ even those miserly numbers. And while he thinks that similar demographic changes (particularly a fall in the working age population) are affecting other developed nations, he asserts that the impact is much more immediate in the UK. In his mind, we lead the pack in that respect. The effect will be to limit the pace at which the British economy will increase to somewhere below 1.3%.
I’m unhappy with 2.6%, you can imagine how I feel about 1.3%.
I’m not denying that the UK and our peers are experiencing major demographic shifts, nor am I denying that such shifts act as a headwind for economic activity.
But if we must have policymakers meddling in the capital markets, let’s at least demand more from them. And let’s hear them add thier voice to calls for the kinds of reforms required to lift us from the malaise they have identified.