Analysis: Tightening of fiscal policy lies at heart of stagnation

Published on 29/03/2012 03:22

This latest revision to the UK GDP figure does not tell us much except help confirm the weak recovery. GDP now stands at just over 4 per cent below its pre-recession peak after a peak-to-trough fall of more than 7 per cent in the recession, writes Brian Ashcroft

Employment is now 1.3 per cent below its pre-recession peak after falling by only 2.3 per cent in the recession. Interestingly, the change in the number of hours worked is closer to the GDP picture than the jobs picture. Hours worked are now 3.4 per cent below their pre-recession peak after falling by 4.4 per cent in the recession.

Two conclusions follow. First, the rise in unemployment would have been considerably greater if job change had matched GDP change. Secondly, labour productivity has fallen. Productivity per worker has dropped significantly as many agreed to a cut in hours. But the still smaller fall in hours worked also suggests that productivity per hour has fallen. Either way, the competitiveness of UK businesses has suffered.

The survey evidence suggests that the UK economy was stronger in the first couple of months of 2012, so a double-dip recession should be avoided. But there are no guarantees.

So why is the recovery so weak? And why has recovery in the UK been so much weaker than in the US?

Adam Posen, the American external member of the Monetary Policy Committee of the Bank of England has essentially one answer: the UK government’s fiscal austerity programme. Mr Posen estimates that “cumulatively, the UK government tightened fiscal policy by 3 per cent more than the US government did”. Therein lies the principal difference.

• Brian Ashcroft is Emeritus Professor of Economics University of Strathclyde.