A long running theme of this website has been that the collective economic experience in the UK has been much better than the individual one. In other words the aggregate size of the economy has risen but the benefits have been much weaker by the time they arrive at you or me. There are various issues here such as the rise in the UK population and no doubt many of you will be wondering if some funds have been siphoned off by the 0.1%?! However on Friday the Chief Economist of the Bank of England addressed this issue so let us take a look at what he thinks about it. If you want it in a nutshell he put it like this.
The language of “recovery” simply did not fit their facts
The aggregate performance
This was covered here.
Since 2009, however, all three measures have begun to recover: GDP has risen by around 14%, employment by around 8.5% and wealth by around 35%. These are strong recoveries. Indeed, all three measures now exceed their pre-crisis peaks: GDP is 7% higher, employment 6% higher and wealth over 30% higher than in 2008.
So far so conventional, in terms of view although there is something in there so central bankerish that perhaps our central banker does not see it. I am referring to him using an increase in wealth which via house and equity prices is something he has helped to drive. This of course disproportionately benefits the already well-off.
Just as a reminder this recovery has not been great if we look back at others.
Even after the Great Depression of the 1930s, GDP was 16% higher. For those with a long enough memory, this time’s recovery is likely to feel quite anaemic, relative to those in the past.
What never seems to occur to central planners is to wonder if there would have been a better recovery without them! Instead of course we get a call for “More! More! More” or as our Andy puts it “muscular easing”.
The individual experience
Andy brings up a metric that will be very familiar to readers of my work.
GDP is a measure of the size of the economic pie, a pie that has grown substantially larger since 2009. But so too has the number of people eating it. Taking the two together, GDP per head has risen significantly more slowly than aggregate GDP since 2009. Indeed, GDP per head today is only around 1% above its pre-crisis peak
So 1% is the new 7% if you wish to put it like that.
Andy heads towards a metric that covers the flaw in GDP numbers which I regularly cover concerning Ireland. Indeed as recently as last Wednesday I wrote about my concerns re the 21% increase in GDP recorded in a single quarter.
GDP measures income from all UK-based activities. But not all of that income flows to UK citizens…….
Okay what is the answer then?
If we take net overseas income out of GDP, to give a measure of net national disposable income per head, it has recovered even more slowly than GDP per head. It is currently at levels little different than its pre-crisis peak. National income per head suggests there has scarcely been any recovery.
As discussed in the comments section on here over the weekend ( h/t Andrew Baldwin) there is a problem with scarcely any recovery. You see the chart provided shows a fall of ~2%. If a 1% rise merits a mention which is a ~2% fall brushed over? I have looked at the data and note that in 2007 we saw £24,068 and in 2015 we saw £23,718. Or a drop which turns out to be of 1.5%.
Now some care is needed here as what Ireland with its wild swings in recorded exports and imports for 2015 taught us is that official data is unreliable in this area.In my opinion the recording of investment flows is even worse. But if you take them as they are then in fact “there has scarcely been any recovery” is the new down.
Indeed for a substantial group the problem predated the credit crunch.
Half of all UK households have seen no material recovery in their real disposable incomes since around 2005.
Generation X face a worrying future
Regular readers will be aware of the factors at play here but the Resolution Foundation has some new data on the subject and skipping the politicisation as ever let us take a look.
Young people have experienced the biggest pay squeeze in the aftermath of the financial crisis, seen their dreams of home ownership drift out of sight.
Indeed the meat of the situation comes here.
In contrast to the taken-for-granted promise that each generation will do better than the last, today’s 27 year olds (born in 1988) are earning the same amount that 27 year olds did a quarter of a century ago. Indeed, a typical millennial has actually earned £8,000 less during their twenties than those in the preceding generation – generation X.
A little care is needed here as we have been through a sharo downturn in this period but even before it there were signs that there may be trouble ahead.
there are signs that problems preceded the recent crisis. Those millennials who were 25 years old before the financial crisis hit were already seeing no pay progress on preceding cohorts.
This is a clear change after more than a few generations of progress but I would now lile to make a point which the Resolution Foundation does not. Please think again about the policies that Andy Haldane has supported before reading the bits below.
evidence that the pay of today’s workers has been suppressed by firms filling deficits in defined benefit pension schemes that provide for older or retired workers. Some estimates suggest that as much as £35 billion is being diverted to this effort each year by businesses.
This is an example of how QE has sucked money out of businesses rather than boosting the. So it has weakened businesses whilst supporting gains for shareholders on it way to creating exactly the wrong set of economic incentives. For those who are unaware of the methodology the lower Gilt yields driven by QE style policies make (defined scheme) pension benefits larger which means that company funds are diverted to fill the perceived gap. Stealers Wheel were kind enough to summarise my views on those who have not only let this state of affairs exist but have in fact made it worse.
Clowns to the left of me jokers to the right
Also rental costs are higher which of course relates to the fact that house prices have been driven higher by the Bank of England.
With more people in such accommodation and renting costs rising over time, millennials are spending an average of £44,000 more on rent in their 20s than baby boomers did
There is much to consider here as the Chief Economist of the Bank of England echoes two of the main themes of mine. Firstly that just looking at GDP is misleading and secondly that different groups have been impacted very differently by the impact of the credit crunch. However the favourable view of him weakens when you see that he seems blind to the way that policies he not only has supported but wants more of have contributed to this state of affairs. The Resolution Foundation gives us some data on the adverse impacts of QE via pension schemes.
If we stick to Generation X the band rather than the age group we did get this albeit via John Winston Lennon.
All I want is the truth now
Just gimme some truth now
All I want is the truth
Just gimme some truth
All I want is the truth
Just gimme some truth
The proposed takeover by SoftBank of Japan is of course big news. However as I see so many today trying to fit square pegs into round holes in weak attempts to explain it there is the issue of the fall in the UK Pound £ versus the Yen of 21% in 2016. Actually the timing fits with a reversal of the Yen more recently and perhaps getting ahead of the next move of the Bank of Japan.
I also see that the Financial Times is sending out messages about a “‘sad loss of independence’” and cannot help wonder if this also applies to its own recent takeover by a Japanese company?