Saturday, May 17, 2014

US is not closing the gap – and neither is the UK

by Michael Roberts

The US and UK economies may be growing in real terms (after inflation) at about 2.0-2.5% right now, but both are still experiencing the weakest post-war recovery in GDP growth ever.   Look at how the US economy has done since the Great Recession began in 2008.  The subsequent ‘recovery’ is still way weaker than trend growth was before the global slump (red line).  And it is still below potential growth at full capacity, as measured by the US Congressional Budget Office (blue line).  The gap between previous trend growth (red line) and future potential growth (blue line) is bad enough.  But even the gap between potential growth (blue line) and actual growth (black line) will not be bridged until 2016 and there is no chance of returning to where pre-crisis trend growth (red line) would have taken GDP for the foreseeable future.
Closing the gap in output potential
The relative weakness in this recovery is also revealed by how long it took the US economy to get back to full potential growth after the deep double-dip recession of the early 1980s; namely about three years from the trough in 1983 (see black line compared to blue below).  In this current slump, it is now five years since the trough already.
The 1980s recession closed the gap
Indeed, the official US forecasters have had to reduce their expectations for recovery every year.  In 2007, the US economy was on trend to reach $16trn real dollars by now  (black line); in 2010 the trend fell so that $15trn was the maximum that could be achieved by 2014 (green line); and in 2013 that was revised down again to $14.5trn (red line).  But real GDP has failed to meet any of those trend targets and currently stands at $13.5trn (blue line).  It is not closing the gap.
Plosser on the gap
It’s the same story with ‘booming’ Britain.  BoE governor Mark Carney is now saying that the UK economy is heading back to ‘normal’ and forecast 3.4% real growth this year, dropping back to 2.7% from then on.  If that is normal, then it is a ‘new normal’.  Recoveries in previous recessions in the UK led to real GDP growth hitting 6% by the mid-1980s after the slump of the early 1980s (black line).  After the recession of the early 1990s, the UK economy recovered to a 5% growth rate by 1993 and stayed above 3% a year until the end of the decade (red line).   But in this recovery, after four years, growth has been under the long-term trend rate of 2.5% and is not expected to exceed that rate for the foreseeable future (blue line).
UK recovery
In previous recessions, the gap between actual growth and maximum potential was eventually eliminated within 5-8 years – long enough.  But this time, that gap has no prospect of being filled.  The UK economy has wasted its potential for the last five years and will continue to fail to make up lost ground.
Uk recovery 2

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