Why it’s complacent to talk about record economic growth

The Bank of England is forecasting the fastest growth since 1941 this year – but that’s not something we should be celebrating, argues Ben Chu

Despite the Bank of England’s predicted surge in GDP, by the end of the year we would still only just be back to where we were before the crisis struck (AP)

The “fastest growth rate in more than 70 years” sounds like a cause for celebration.

And it’s true that growth of 7.25 per cent, which is the Bank of England’s latest forecast for 2021 released on Thursday, would be the largest calendar year expansion since 1941 when Britain was still scaling up production to fight the Nazi menace.

But it’s nothing to write home about, let alone celebrate.

When it comes to economic forecasts, one of the worst tendencies of politicians and journalists is to focus on rates of change rather than levels.

The UK economy, as we shouldn’t need reminding, experienced its most punishing year in three centuries in 2020 thanks to the pandemic and lockdowns.

The level of our national output, or GDP, dropped by an astonishing 21 per cent between the final quarter of 2019 and the second quarter of 2020.

And the level of GDP today is currently still well below (around 5 per cent) where it was at the end of 2019 before most of us had ever heard of something called Covid-19.

Even if the economy did grow at the historically rapid rate projected by the Bank over the coming months, by the end of this year we would still only just be back to where we were before the crisis struck.

“That’s two years passed with no growth in the economy,” as the Bank’s Governor Andrew Bailey rightly stressed on Thursday.

Economic booms happen when the economy grows more rapidly than previously expected. This would not be a boom, but Britain climbing out of a very deep hole.

Perhaps this sounds overly downbeat. It’s true the Bank of England’s latest forecast is stronger than its February projections, reflecting the success of the vaccine roll-out and the ability of UK businesses to function better in the post-New Year lockdown than in previous ones.

We seem to be climbing out of the hole faster than expected, which is certainly to be welcomed.

And the projection for unemployment really is considerably better, with the Bank now expecting joblessness to peak at just 5.4 per cent this year, rather than rising to 7.8 per cent, reflecting Rishi Sunak’s belated extension of the furlough in the March Budget.

But getting the right perspective on what’s happening in the economy is vital because it influences the climate around economic policy decisions – and also public expectations.

Relative to where we expected GDP to be before the pandemic struck, the economy would still be languishing at the end of this year.

Indeed, on the Bank’s current forecasts there would be a permanent gap.

Even with its upgraded forecasts, in the wake of the pandemic the Bank predicts long-term economic scarring of 1.25 per cent of GDP, or £25bn by 2023.

This represents the damage to our national productivity from the collapse of business investment last year and the wasting of people’s skills and education as a result of the disruption of the pandemic.

Is that permanent lost output inevitable? Many serious analysts don’t think it has to be. They believe that if the Chancellor’s fiscal policy were more expansive and better designed we could eliminate that scarring entirely.

Impossible? Those inclined to believe so should look at the latest official projections in the US, where the $2 trillion fiscal stimulus of the Biden Administration is set to push the level of American GDP above its pre-crisis path this year – and without generating excessive inflation.

In the UK context, the danger of talking about an economic boom and focusing on rates of change, rather than levels, is that we lower our expectations in the erroneous belief that economic policy is doing everything we can reasonably expect of it.