Ten years on, we’re yet to fully escape the crash Roger Bootle

As a teenager, I once asked my Latin teacher when the Roman Empire fell. Correctly perceiving that I was expecting an answer like “the 14th August 410”, he shot me an old-fashioned look, before pointing out that it didn’t occur at a single point, but was rather a process punctuated by several key events.

Something similar is true of the Great Financial Crisis. There were several key events that occurred during 2007-09. Accordingly, the 10th anniversary industry will be running for quite a while. But there is general agreement that the first significant event that can be thought to have marked the beginning of the crisis was the closure of three funds run by BNP Paribas on August 9 2007, for which the 10th anniversary fell last week. In due course, I will add my twopennyworth on the causes of the crisis. But first, some perspective.

Financial markets were, of course, at the epicentre of the crisis and many asset prices fell precipitately. In the UK, the biggest drops were recorded by equities and commercial property, which both saw falls of about 40pc. By contrast, the Nationwide house price index fell by about 20pc.

It is interesting to reflect on how these various assets have performed over the last 10 years. As you would expect, they have all increased. Rather surprisingly, despite persistent low interest rates and huge amounts of money being pumped into the system under the policy of quantitative easing (QE), the prices of the major asset categories have not risen as fast as the money value of GDP to which, over the long run, they must surely be related. But timing is everything. Since Q1 2009, whereas money GDP has risen by only about 30pc, the FTSE 100 Index has doubled.

It may seem a distant memory now but 2007-09 was truly scary. The movements in asset prices directly

‘It may seem a distant memory now but the financial crisis of 2007-09 was truly scary’

caused great anxiety to wealth-holders but the greater and more general worry was that financial weakness would cause an economic collapse. In most countries, the economy still grew in the latter part of 2007 and falls in output only began in early 2008. Accordingly, many economic comparisons take Q1 2008 as their starting point. From then, real output plunged 9pc in Japan, 6pc in the UK and the eurozone, and 4pc in the US. Looking back now, we can see that by the end of 2009 the US and UK economies were starting to recover. Even so, that was not obvious at the time. Comparisons with the Great Depression of the 1930s abounded.

Here in the UK, because of our particularly large financial sector, the crisis dealt us a heavy blow. Our economic performance continued to be poor, roughly similar to Japan’s and the eurozone’s, until late 2013.

Yet the UK’S comparatively strong recent growth has put it well ahead of both the eurozone and Japan. Since Q1 2008, the UK economy has grown by about 9pc, a fair bit lower than America’s 14pc, but significantly above the 4pc or so recorded by Japan and the eurozone. In short, the world economy has performed far better than almost anyone predicted at the time of the crisis, and this surpassing of expectations has been particularly strong in the case of the UK, which many experts were writing off in 2008-09. Does this ring a bell?

But before you rush off to crack open a bottle of delicious English sparkling wine, the UK’S performance only looks that good if Japan and the eurozone figure loom large in the comparison. Over the period since Q1 2008, excluding China, emerging markets have increased their output by about 30pc. And China’s output has doubled. Moreover, the UK’S performance was boosted by substantial immigration. Per capita GDP is still up on Q1 2008, but only by a mere 3pc, putting us behind Japan, let alone the US. This small increase in our per capita GDP reflects weak productivity performance. Indeed, compared to Q1 2008, productivity is now only 1pc higher. Admittedly, this is partly a reflection of something very positive, namely our extraordinary success in creating jobs. But only partly. And the weakness of productivity is a primary reason (along with higher taxes and the weak pound) for the failure of living standards to pick up. What’s more, even after the economic recovery of the last few years, GDP and productivity are about 16pc below the level they would now be at had they continued to grow at the same trend rate before the crisis.

After past major downturns, GDP has recovered to somewhere near its previous trend level. The current conventional wisdom is that this is simply impossible now. I wouldn’t be so sure. We still haven’t yet fully escaped from the forces that held the economy back in the wake of the crisis. When we do, strong rates of growth may prevail for an extended period. Talking of which, the eastern part of the Roman Empire, Byzantium, went on till the fall of Constantinople – on May 29 1453. So there.

Roger Bootle is chairman of Capital Economics roger.bootle@capitaleconomics.com