Transcript growth rate - Left Foot Forward

‘Going for Growth’
Wendy Carlin
UCL & CEPR
UK’s economic predicament
• Growth is weak … no V-shaped recovery where growth is
faster than trend to return economy to previous growth path
• ‘Double-dip’ debate diverts attention from fact that growth
rate is unlikely to be above trend
Bank of England Projection for the level of GDP
Source: BoE Inflation Report February 2011 Chart 5.11
Longer-run perspective: permanent loss of
approx. 10% GDP for UK
GDP: Forecast vs. pre-recession trend
2008=100
180
World
UK
170
160
150
140
130
120
110
100
90
1993
*dotted lines represent pre-recession trend
1996
1999
2002
Source : Oxford Economics/Haver Analytics
2005
2008
Fcst
2011
UK’s front-loaded fiscal consolidation
World: Fiscal policy
% of GDP
4
2009
2010
2011
3
2
1
0
-1
-2
Planned discretionary fiscal policy
changes. +ve represents stimulus
US
Eurozone France Germany
Source : Oxford Economics
UK
Japan
China
UK’s economic predicament
• Fiscal consolidation is necessary but current plan is
too front-loaded
– If fiscal consolidation was to be expansionary, we should
see front-loaded positive expectations effects on
consumption & investment
– Preferable would be to back-load the consolidation by
building in commitments (legislation) to lower
entitlements (e.g. higher pension age, lower public sector
pensions)
• these do not reduce aggregate demand now but secure the longterm commitment to a reasonable debt ratio
Implications for growth strategy
3 opportunities that should not be squandered
1.The labour market has performed better than in previous
recessions – danger of losing this advantage in next couple of
years; focus on entrants to labour market
2.Firms entered the crisis period with high profits – reflected in
low bankruptcies in crisis BUT investment has been extremely
low
Real interest rates are very low … in principle, favourable conditions for
private & state investment
3.Large depreciation. How to capitalize on this to produce the rebalancing required?
Unemployment rates
Source: BoE Inflation Report February 2011
Participation rate
Source: BoE Inflation Report February 2011
Company liquidations in England and Wales and GDP
Source: Bank of England Inflation Report February 2011 .
UK Real interest rates
UK: Real interest rates
%
10
Short rates
Forecast
8
Long rates
6
4
2
0
-2
-4
-6
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source: Oxford Economics
‘Rebalancing’
– Dealing with regulatory / competition issues in banking
and introducing macro-prudential component into
stabilization policy regime
– Shifting the balance in the contributions to the growth of
demand: from consumption, housing & government
expenditure to investment and net exports
– The longer term role of finance as a producer of tradeable
services, i.e. as an export industry
‘Rebalancing’
• Clear that the balance in the pattern of growth has to change
toward investment and net exports
• Less clear that this entails a major shift in the UK’s industrial
specialization
• UK’s high value added tradeables sectors are in finance,
business services, cultural industries, education,
pharmaceuticals, biotech/medicine, selected high tech
engineering, …
• Rely on excellent higher education system, international
labour & capital mobility
Why do tradeables matter?
• In long run, welfare depends on productivity growth, which
requires investment and innovation
• In an open economy, ability to compete in export markets is
key to being able to pay for imports
• Depreciation provides a quick boost to competitiveness – but
it reduces living standards
• Can only contribute to rebalancing & longer run productivity
growth if the breathing space is taken advantage of by
investment in tradeables
– What is UK’s comparative advantage? Radical innovation industries
Government role
• Using public debt as a buffer in face of large shock is sensible
• Growth is essential to reducing public debt ratio
• Tight constraints on traditional current government
expenditure and tax cuts
• Exploit relative price changes with complementary policies
that are light on the current deficit and target growth
Make use of
• Low interest rate environment to promote investment
Note the weakness of global as well as UK investment prior to financial
crisis in spite of high profitability … cannot rely on adequate rebound of
private investment
• Complement behavioural changes induced by increase in oil
price with policies to steer large-scale structural change to
low-carbon economy
• Boost to tradeables from depreciation – use complementary
not conflicting policies such as immigration controls that
damage higher education & other high VA industries
There are economically sensible policies available to support
growth consistent with debt stabilization – challenge is in
sufficiently creative / imaginative politics
Chart 4.8 CPI inflation and the contribution of VAT,
energy prices and import prices(a)
Sources: ONS and Bank calculations.
(a) The blue swathe sums the minimum and maximum of the individual estimated impacts of VAT, energy prices and import prices on CPI inflation. The VAT impacts are based on the 25%
and 75% pass-through assumptions shown in Chart 4.2, adjusted for changes in petrol prices that are incorporated in the energy price impacts. The energy price impacts are the direct
and total including indirect estimates shown in Chart 4.4. The import price effects are based on the estimates shown in Chart B in the box on page 34. The green swathe shows
CPI inflation less the minimum and maximum of the blue swathe.