Monday, 17 July 2017

Britain’s lost decade

By Tom O’Leary

The economic crisis which began in the 1st quarter of 2008 is now entering its tenth year. It is the longest economic crisis that anyone alive today in this country will have experienced. It is not abating. On the contrary, it is showing signs of deepening once more.

As this is such a decisive turning-point in economic life, it will have a profound impact on political life for many years to come, even long after it finally ends. The key question is how will it end?

Characteristics of the crisis

The UK economy has grown by just 8.1% over 9 years, from the 1st quarter of 2008 to the 1st quarter of 2017. This is an annual average growth rate of less the 1% in real GDP. By comparison, 9 years after the 1929 crash, the economy had expanded by 18.6%. In the UK, the current Great Stagnation is now much worse than the medium-term outcome of the Great Depression.

The driving force behind the slump is a lack of investment. Chart 1 below shows the change in real GDP and its components from the 1st quarter of 2008 to the 1st quarter of 2017.

Chart 1. Real GDP and Components, Q1 2008 to Q1 2007


GDP has risen by over £151bn during the crisis. While Consumption (both Household and Government Consumption combined) has risen by over £112bn, Investment has risen by just over £9bn. The decline in Net Exports is simply a function of the much greater growth in Consumption than Investment over the period – both exports and imports have risen, but imports have risen more.

There could hardly be a more striking refutation of the idea that there can by any such thing as a ‘consumption-led’ recovery. During this crisis Consumption has been rising much faster than Investment. Taking Consumption as a whole, both Government and Household Consumption, this has risen by 7.8% during the crisis, more than twice as fast as Investment which has risen by just 3.1%.

As a result, the proportion of the economy directed towards Consumption has risen and the proportion directed towards Investment has fallen. This can be illustrated very starkly by what has occurred during the crisis itself.

It is widely accepted that one characteristic of the pre-crisis period is that Consumption had been growing faster than Investment for a prolonged period. Taking just Consumption and Investment (and leaving aside net exports, inventories and accounting discrepancies) by the 1st quarter of 2008 the proportion of the economy directed towards Consumption had reached 82.5% and Investment fell to just 17.5%. However, in the crisis itself, Consumption has risen to 83.1% while Investment has fallen further, to 16.9%.

Taking the whole economy, in the crisis Investment has risen by just £9.3bn and GDP has expanded by £151.3bn. Therefore the rise in Investment has comprised just 6.2% of the rise in GDP during the crisis, down from Investment being over 16% of pre-crisis GDP. The course of the recovery has not begun to resolve the crisis. It has only deepened it.

Naturally most people do not obsess about GDP data. They do care though about living standards. These have fallen dramatically for most people. Chart 2 below shows the trend in real household disposable income.

Chart 2. Real Household Disposable Income


This is third episode of falling real household disposable incomes. The first was the Great Recession its in 2008 onwards. The second was austerity from 2010. We are now in third fall in incomes in a decade.

From simple arithmetic, if real GDP has risen even marginally but real household incomes have fallen sharply, this means that some other actor in the economy is gaining a greater share of GDP at household’s expense. This is the case currently, as profits are rising.

The implications of this important development will be examined in a follow-up piece.

Tuesday, 11 July 2017

Trump's economy - cyclical upturn and long term slow growth

By John Ross
It is crucial for both economic and geopolitical perspectives to have an accurate analysis of trends in the US economy. The publication of the latest revised US GDP figures is therefore important as it provides the latest opportunity to verify these developments. This data confirms the fundamental trends in the US economy under Trump:
  • The US remains locked in very slow medium and long-term growth – particularly in terms of per capita GDP growth.
  • Due to extremely weak growth of the US economy in 2016 a purely short-term cyclical upturn is likely in 2017 - but any such short-term cyclical upturn will be far too weak to break out of this fundamental medium and long-term trend of US slow growth.
This article analyses these economic trends in detail, considers some of their geopolitical consequences, and their impact on domestic US politics.

US GDP and per capita GDP growth

In the 1st quarter of 2017 US GDP was 2.1% higher than in the first quarter of 2016. Making an international comparison to other major economic centres:
  • US total GDP growth of 2.1% was the same as the EU’s 2.1%.
  • Making a comparison to the largest developing economies, US 2.1% growth was far lower than China’s 6.9% or India’s 6.2%.
This data is shown in Figure 1
However, in terms of per capita GDP growth the US was the worst performing of the major international economic centres, because the US has faster population growth than any of these except India. US annual population growth is 0.7%, compared to 0.6% in China and 0.4% in the EU – India’s is 1.3%. The result therefore, as Figure 2 shows, is that US per capita GDP growth in the year to the 1st quarter of 2017 was only 1.3% compared to the EU’s 1.7%, India’s 4.9% and China’s 6.3%.
In summary US per capita GDP growth is very weak – only slightly above 1%.
Figure 1
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Figure 2
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Business cycle

In order to accurately evaluate the significance of this latest US data it is necessary to separate purely business cycle trends from medium/long term ones – as market economies are cyclical in nature failure to separate cyclical trends from long term ones may result in seriously distorted assessments. Purely cyclical effects may be removed by using a sufficiently long term moving average that cyclical fluctuations become averaged out and the long term structural growth rate is shown. Figure 3 therefore shows annual average US GDP growth using a 20-year moving average – a comparison to shorter term periods is given below.
Figure 3 clearly shows that the fundamental trend of the US economy is long-term slowdown. Annual average US growth fell from 4.4% in 1969, to 4.1% in 1978, to 3.2% in 2002, to 2.2% by 1st quarter 2017. The latest US GDP growth of 2.1% clearly does not represent a break with this long-term US economic slowdown but is in line with it.
Figure 3
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Cycle and trend
Turning from long term trends to analysis of the current US business cycle, it may be noted that a 5-year moving average of annual US GDP growth is 2.0%, a 7-year moving average 2.1% and the 20-year moving average 2.2%. Leaving aside a 10-year moving average, which is greatly statistically affected by the severe recession of 2009 and therefore yields a result out of line with other measures of average annual growth of only 1.4%, US average annual GDP growth may therefore be taken as around 2% or slightly above. That is, fundamental structural factors in the US economy create a medium/long term growth rate of 2.0% or slightly above. Business cycle fluctuations then take purely short-term growth above or below this average. To analyse accurately the present situation of the US business cycle therefore recent growth must be compared with this long-term trend.
Figure 4 therefore shows the 20-year moving average for US GDP growth together with the year on year US growth rate. This shows that in 2016 US GDP growth was severely depressed – GDP growth in the whole year 2016 was only 1.6% and year on year growth fell to 1.3% in the second quarter. By the 1stquarter of 2017 US year on year GDP growth had only risen to 2.1% - still below the 20-year moving average.
As US economic growth in 2016 was substantially below average a process of ‘reversion to the mean’, that is a tendency to correct exceptionally slow or exceptionally rapid growth in one period by upward or downward adjustments to growth in succeeding periods, would be expected to lead to a short-term increase in US growth compared to low points in 2016. This would be purely for statistical reasons and not represent any increase in underlying or medium/long US term growth. This normal statistical process is confirmed by the acceleration in US GDP growth since the low point of 1.3% in the 2nd quarter 2016 – growth accelerating to 1.7% in 3rd quarter 2016, 2.0% in 4th quarter 2016 and 2.1% in 1stquarter 2017.
Given the very depressed situation of the US economy in 2016 therefore some increase in speed of growth may be expected in 2017 for purely statistical reasons connected to the business cycle.
Figure 4
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Conclusion
The economic and domestic US political conclusions of the trends shown in the latest US data are therefore clear
  • US economic growth in 2016 at 1.6% was so depressed below even its long term average that some moderate upturn in 2017 is likely. President Trump’s administration may of course claim ‘credit’ for the likely short-term acceleration in US growth in 2017 but any such short-term shift is merely a normal statistical process and would not represent any acceleration in underlying US growth. Only if growth continued sufficiently strongly and for a sufficiently long period to raise the medium/long term rate average could it be considered that any substantial increase in underlying US economic growth was occurring.
  • This fall of US per capita GDP growth to a low level clearly has major political implications within the US and underlies recent domestic political events. Very low US per capita growth, accompanied by increasing economic inequality, has resulted in US median wages remaining below their 1999 level – this prolonged stagnation of US incomes explaining recent intense political disturbances in the US around the sweeping aside of the Republican Party establishment by Trump, the strong support given to a candidate for president declaring himself to be a socialist Sanders, current sharp clashes among the US political establishment etc.
  • Even a short-term cyclical upturn in the US economy, however, is likely to be translated into increased economic confidence by US voters. This may give some protection to Trump despite current sharp political clashes in the US with numerous Congressional investigations of President related issues and virtually open campaigns by mass media such as the New York Times and CNN to remove the President. The latest opinion poll for the Wall Street Journal showed that men believed the economy had improved since the Presidential election by 74% to 25%, while women believed by 49% to 48% that the economic situation had not improved.
In terms of geopolitical consequences affecting China:
  • The short term moderate cyclical upturn in the US economy which is likely in 2017 will aid China’s short term economic growth – particularly as it is likely to by synchronised with a moderate cyclical upturn in the EU. Both trends aid China’s exports
  • Nevertheless, due to the very low medium and long-term US growth rate the US will not be able to play the role of economic locomotive of the G20. In addition to economic fundamentals IMF projections are that in the next five years China’s contribution to world growth will be substantially higher than the US. It is therefore crucial China continues to push for economic progress via the G20 and China has the objective possibility to play a leading role in this.
  • Very slow growth in the US in the medium and longer term creates a permanent temptation to the US political establishment to attempt to divert attention from this by reckless military action or ‘China bashing’. China’s foreign policy initiatives to seek the best possible relations with the US are extremely correct but the risks from such negative trends in the US situation, and therefore of sharp turns in US foreign policy, must also be assessed.
To keep this article short only a factual summary of the key recent trends within the US economy are given here. A detailed analysis of why the US remains locked in slow medium and long term economic growth is given in my article  Why the US economy remains locked in slow growth  A long term historical analysis of US growth and its relation to economic growth theory may be found in my book The Great Chess Game (一盘大棋? ——中国新命运解析).
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This is a slightly edited version of an article that was originally published in Chinese at New Finance, which was previously published here.