Remember George W Bush landing on the aircraft carrier with a big ‘mission accomplished’ banner hanging in the background? The coalition government is currently going through a similar moment, taking every opportunity to congratulate themselves on Britain’s economic recovery. (You can do your own Google image search for the Photoshop hack of Cameron on the flight deck of the USS Abraham Lincoln)
It’s true that fewer people are out of work, that the housing market is moving, and that GDP is up. But the economy hasn’t made up the ground it has lost, and doesn’t look likely to any time soon. Wages have stagnated while prices have risen, so most of us are poorer today in real terms. And the recovery is not driven by investment or exports, but by consumer spending and new debt.
This is all detailed in a rather striking post-budget briefing note from the Resolution Foundation, a think tank focused on low and middle income households. “The strength of the economy in 2013 was primarily based on consumer spending” they warn. “Yet household incomes have not kept pace with this spending, meaning that the recovery has instead been built on a willingness among households to draw down savings and take on new unsecured borrowing.”
Debt was responsible for much of Britain’s pre-crash growth. People withdrew equity from their houses or took on unsecured debt on credit cards and easy personal loans. That slowed dramatically during the crisis, and is now picking up again, but we start from a much higher level of indebtedness.
We now face an unenviable choice, suggests Matthew Whittaker, senior economist at the Resolution Foundation: “Re-stoke private debt and risk generating the same problems of instability encountered during the last boom, or wean the economy off its credit addiction but face permanently lower levels of real growth.”
The first option is inherently unsustainable, and will end with another debt crisis at some point. The second option essentially puts the British economy onto a GDP slow lane, where growth never returns to the pre-crisis trend line. We’d be in a new normal of slower growth.
The Resolution Foundation paper doesn’t come from a postgrowth perspective, but it is a whisker away from what I’ve been suggesting about Britain already being a post-growth economy and just not knowing it yet. Or what Richard Heinberg says in his book The End of Growth. Or Tim Morgan of Tullett Prebon, who forecasts a permanent slump in which “the UK economy is likely to do little better than mark time”. James Rickards explains how our problems are structural rather than cyclical in his new book The Death of Money, and thinks that we are in a depression.
They’re all coming from different perspectives, but with one common theme: return to business as usual is unlikely. There are a whole cluster of factors – debt, demographic transition, higher energy prices – that are combining to create a new low-growth reality.
As I’ve written about before, that should not be considered the end of the world. I suspect it is inevitable, the natural end point of a mature industrial economy. But that doesn’t mean we can relax. Growth can’t just be turned off, and the urgent thing now is to plan for a low growth environment. The worst thing we can do is what we’re currently doing – tapping private consumption for the illusion of growth, as that will simply pile up into a debt crisis when the growth to pay it off fails to materialise. That is quick-fix growth to get us past the next general election.
I might be wrong. I am well aware that mine is a minority view, and I’d be happy to hear about it if anyone does see a way out of the rabbit hole we appear to have gone down.