GDP being back where it was is not a ‘recovery’. Investment needs to recover too.

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August 5, 2014 by Paul Goldsmith


About a fortnight ago the government announced triumphantly that the economy had fully recovered from the recession. To illustrate this they used the fact that output, measured as Gross Domestic product (GDP) lost in the recession has bounced back to where it was back in 2008. Never has the shortcomings of GDP as a measure of the success of an economy been so laid bare. This ‘recovery’ was trumpeted as a ‘total vindication’ of George Osborne’s austerity strategy, but look even a tiny bit beneath the figures and you will find that they really do give a good example of ‘lipstick on a pig’.

The most important thing to note here is that GDP figures were emphasised as a whole, not per capita (how much national income is earned per head of population). That figure is 5% below where it was in 2008, which means that all of us in work produce less than we did six years ago. Another way to look at this is that 180,000 more people are in work than when the recession began, but only now are we producing the same amount.

There are various reasons for this loss of productivity (which measures output per head). The first is the type of jobs that have been created. A good example of this is that 100,000 estate agent and related jobs have been created since 2010. This is more than double the jobs created in manufacturing and construction. Think about what that means, instead of jobs being created to make or build things we have a load of people selling fewer homes, leading those homes to be overpriced. The resultant house price bubble is seriously exercising the Bank of England, but they can’t raise interest rates as they might do to try and calm the market, because that would choke the recovery off very quickly.

Whilst on the topic of the types of jobs created, I have written before about the effect of so many jobs being created that pay so little, and of the insecurity of zero hours contracts. Put very simply, if you earn very little, you are constantly needing to think about how to get a job that pays a living wage, and that affects your productivity. If you have little job security, your mind will be on that rather than what you are doing, lowering productivity. If you are paid so little that you might as well be on benefits, it is likely to affect your motivation, affecting productivity. In-work poverty is one of the greatest economic scandals I can think of, and is certainly nothing to be cheered.

But that still doesn’t give the main reason why productivity has fallen so much. The coalition trumpets the creation of so many jobs, but almost all of those jobs involve a human being interacting with a man-made aid to production (‘capital’ to economists, ‘machinery’ to you and I). Let’s use a simple example, if you try and put an IKEA cabinet together with an old, misshapen screwdriver, it will take you a long time. With a new screwdriver, less time, and with a cordless screwdriver, the least time. The point is that however educated and trained our workforce, the quality of the machinery they use is important, and machinery needs to be invested in. Have you stood at a counter whilst someone waits for their computer system to slowly work? Probably lack of investment. Have you noticed that some shops have contactless payment (just press your card on the reader) and some don’t? Probably lack of investment.

A lack of investment is a structural weakness in an economy, the impact of which can last for a very long time. It can in itself block a sustained recovery. The GDP figures that have been released over the past few years have shown many positives, including a rise in net exports and government consumption, and we know that household consumption is recovering as savings are reducing and borrowing is increasing. That leaves one last component of aggregate demand (total expenditure in an economy) and that is investment. That is down £50 billion since 2008.

The reason why investment is down is that firms are reluctant to invest, even if they have a lot of cash in the bank. This can be explained a little by a lack of confidence in the future, but also by where firms’ owners would rather have their money. With so many unemployed, who are at the moment able to be employed on such low wages, a firm can afford to hire more workers just to produce the same output. Repeated across the country and you have the explanation of our GDP per capita being reduced as much as it is. You also have an explanation of why average wages are down as much as Ed Balls pointed out they were in his Bedford speech last week (2.3%) in this Parliament. This will have a roll-on effect into the future, as letting capital get old and out of date builds up into a cumulative reduction in not just output, but international competitiveness too.

Which is why saying that because GDP has reached its previous output means that our economy has recovered is really quite hollow. Look inside this recovery, and you can see that a small amount of business owners and landlords are definitely better off, but it has come at the expense of a lot of workers.

The Coalition, and I must include Lib Dems in this as they will also claim responsibility for the economic recovery, will claim at the next election that they have succeeded. The Labour Party are spending this summer recess actively explaining why they haven’t. What gets through to the voters depends on how close the voters are prepared to look. What I do know is that Labour won’t have to look far to show how fragile this recovery is. GDP figures are not enough. Policies that will result in a recovery in investment should be a priority now.

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