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Q: How close are we to getting back to a normal level of growth in the UK? A: This is normal – the policy framework is far from being normal – but the growth backdrop is much more normal than the period prior to the recession. Q: What is different now to the years leading up to the financial crisis?
A: Mervyn King, the ex-Governor of the Bank of England, referred to the ten years from mid-1992 as the ‘nice decade’. GDP growth was consistently above 2.5 per cent, disposable income was growing, inflation was low and house prices were rising. But as wonderful as this seemed, other indicators warned of trouble ahead. Household borrowing rose to a peak in 2008, while the trade balance and the government budget deteriorated. Having been in surplus in the three financial years to 2000/01, the deficit by 2007/08 was not far short of 3.0 per cent of GDP. This was an era during which we were living on borrowed money and literally borrowed time. It was an abnormal period, resulting in a recession and financial crisis as worrying as anything ever experienced.
Q: What can we expect from here?
A: The good news is that much of the damage done during the recession has been mended. The bad news is that the uncertainty investors are dealing with is normal; at least, more normal than the fifteen years to 2008. We were led to believe that those levels of economic growth were sustainable, but productivity in the lead-up to 2008 didn’t increase at all. Last year, according to the ONS, the economy grew by 2.6 per cent and 2015, we think, will be similar. But, believe it or not, even this rate of growth is probably faster than we can sustain over the longer term. Employment is near its all-time high, so growth will need to come from rising productivity. Indeed, unless productivity gets closer to its historical average, even growth above 2.0 per cent will be difficult to maintain. There is still some more normalising to do, and as that takes place, we should see an increase in household incomes. Unfortunately, those memories of uninterrupted growth will become more and more distant. Welcome to being normal.