Belfast Telegraph

The depression that might not have been...

By Brendan Keenan

The world seems to be getting closer to agreeing what has gone wrong, but not what to do about it.

Recent alarming and terrifying statistics have led to wide agreement that this is indeed a depression.

It seems to have dawned on several UK analysts simultaneously that they ought to look at the actual level of output (GDP), rather than the annual change.

And several publications, including the Financial Times and The Economist have examined, not just the fall in output, but the fall compared with what it might have been if none of this had happened.

That is truly scary. The conventional measures of depression themselves are bad enough. The downturn began in 2008 and UK output per person is still 7% below that level. This is why it is called a depression. There has been growth since then, but not enough to get back to the previous peak.

It is a similar story in other economies, with US output per person down 4% and only Germany in positive territory compared with four years ago.

As for what might have happened, the analysis in The Economist tries to look at the full costs of the depression by asking the question; suppose it had never occurred?

To do this, they compared the downturn with 'trend' growth - the assumed sustainable growth rate and something which varies from one economy to another.

On that basis, the costs are staggering. Britons are 13% poorer as measured by lost output, than they would have been had growth continued at its estimated trend of just over 2% a year. Even Germans are 4% worse off.

But wait for the Irish figure! CSO figures show a loss of 19% in real national income since 2007 but, had the economy continued to grow at trend, output would be a full 25% higher than it is. Not only is the decline greater here than in other developed economies, but trend growth is higher than most, at something around 3% per annum.

Those London articles are not the first to look at things in this disturbing way. The Economic and Social Research Institute (ESRI) produced similar estimates for the loss of output and income in its medium term review earlier this year.

On a low growth scenario, it calculated that the permanent loss of output compared to what might have been is around 20%.

On the other hand, the crash happened because banking and government practices allowed output and incomes to grow far faster than was sustainable.

Scale back to say, 1997 and assume no crash, and 2011 output is about 20% less anyway. The lost income should never have been ours in the first place.

From time to time commentators tried to look at things in a more positive way.

Real incomes are still at 2002 levels. There are around half a million more people at work than in 1997. Exports are worth four times more.

Had there been no bubble, unemployment would probably never have fallen below 6%, even with significant net emigration during the 2000s, money incomes would have risen by just 5% a year, and we would all have complained mightily. We would have never known how much worse it could be. But we know now.

The question is not whether it makes us feel better or worse but whether we understand the implications.

Many people assume that recovery means a return to the incomes of 2007. It doesn't.

Even on optimistic forecasts, it will be more than a decade before those levels are regained.

Britons are 13% poorer than they would have been had growth continued at its estimated trend


From Belfast Telegraph