Disappointing GDP? It’s the “New Normal”
GDP figures just released show the economy contracted by 0.5% in the second quarter of 2012 – a third consecutive quarter of decline. This is better than the 0.7% reduction estimated a month ago – but is still disappointing. So what is going on?
The figures are not as bad as they look at first sight. If we allow for the extra Jubilee holiday, the latest GDP estimate points to a flat economy, rather than decline. But other recent data - on employment and retail sales - is more consistent with slow growth. So it is quite possible that GDP will be revised up further in the future.
However, these figures remind us that the economic climate remains tough, and this is likely to be the "new normal" for some time. Our economy is no longer benefiting from the tailwinds - of easy credit, cheap imports and strong confidence - we experienced before the financial crisis. As the UK and other western economies adjust to a post-financial crisis world, we should continue to expect disappointing growth by past standards.
To survive and prosper in this new world, the UK needs flexible, dynamic and competitive businesses able to take advantage of growth opportunities where they arise. We need a stronger focus in government policy on measures to enhance business competitiveness. That offers the best hope of improving growth prospects - but it is a long haul, not a quick fix.
To support growth in the current climate, we need to develop a new set of supply-side policies – aimed at helping our economy adjust to the “new normal” world. These policies should focus on improving the underlying competitiveness of our economy by relieving burdens on business, removing barriers to job creation, investing in skills and an efficient transport infrastructure and making the UK an attractive location for investment. That helps to ensure that the UK is well-placed to tap into the areas of opportunity in the world economy – such as the continued rapid development of Asia and other emerging market economies and the possibilities created by new technology.
This should not mean more public spending and borrowing. Instead, within the 45% of GDP the government is already spending, a higher priority should be given to programmes which will help business competitiveness – such as investment in transport infrastructure. On the tax side, we need a much stronger emphasis on longer term reform – cutting tax rates by spreading the tax base of tax and simplifying the tax structure. The UK is already embarked on a corporate tax reform, which will bring the tax rate down to 22%. A similar long-term plan is needed to restructure and simplify personal taxation and expenditure taxes such as VAT. In many areas, policy is moving in the right direction, but action needs to be bolder. That should include stronger action to ease the burden of business regulation and remove barriers to job creation – for example by creating a fast-track planning system for business developments which create jobs. Radical action across government could be encouraged by the creation of a National Competitiveness Council, chaired by the Prime Minister, with the power to impose business-friendly policy changes on individual departments.
Before the financial crisis, helpful tailwinds meant economic growth could be taken for granted. Now, it is harder to achieve and economic conditions are more volatile. We can’t turn back the tide with continual injections of demand stimulus. Instead, government policies across the board need to be much more supportive of business competitiveness – which is the engine of growth in the “new normal” world we now inhabit.