Double-dip alarm is premature and politically driven
ACCORDING to the latest figures, Britain has fallen back into recession. Some have seized the opportunity to pin the blame on the coalition’s austerity measures, but I don’t believe that’s right, for two reasons: first, this isn’t austerity, and second, I’m not convinced there’s a recession.
Let’s be clear: a budget deficit equal to 7.7 per cent of GDP is not austerity. Despite lots of rhetoric about spending cuts and balancing the books, we have a government that is increasing national debt in absolute terms and only able to reduce it as a percentage of GDP due to some overly-optimistic estimates about future growth.
As to our double-dip recession, when the Office for National Statistics (ONS) releases its GDP figures they are technically an estimate based on incomplete survey data. We are given a figure that is definitely wrong (but based on hard data), rather than one that is almost right (but based on judgement). The reason we all focus on the ONS one is not because it’s better, but because it is official.
When more data becomes available, GDP estimates are revised – often upwards. It is quite possible that in a year’s time we will realise that the first quarter of 2012 was not negative growth after all, and there wasn’t a double dip recession. Many economists were surprised by the negative number, because it contradicted a lot of other (and more reliable) indicators of economic activity. The 2012 first quarter figure of -0.2 per cent is merely part of the sluggish growth we’ve seen for the last couple of years. If the 2011 third quarter figure was +0.1 per cent and the 2012 first quarter figure was +0.1 per cent we would have avoided recession but the economy would hardly be in any better shape.
Opponents of the government have been quick to argue that austerity has caused the “recession”. But since the spending cuts have barely started, they argue it isn’t the cuts directly, but the general public’s anticipation of them that is to blame. In other words, the mechanism is not cash flows, but confidence.
But if confidence is such an important determinant of economic activity, ignoring the insignificance of a -0.2 per cent or a +0.1 per cent growth figure is grossly irresponsible. Stating that we’re “back in recession” risks becoming a self-fulfilling prophecy.
The same people are warning on one hand that confidence is driving the economy, and on the other using flawed data to scaremonger about a recession. The only way I can reconcile those positions is they care more about discrediting the government than the health of the economy.
When the economy becomes a political football, we all suffer. We don’t know whether we’re in a recession or not, and we’d be better off if politicians accepted that.
Anthony J. Evans is Associate Professor of Economics at London’s ESCP Europe Business School.
www.anthonyjevans.com [email protected].