Britain’s economy has been a faithful old hound since the second world war. Enduring bouts of stop-go growth and stagflation, becoming the sick man of Europe and suffering from occasional moments of overconfidence, its longer-term performance has nevertheless been remarkably stable. At least that was true until 2007.
Incomes per person grew at an annual average rate of almost 2 per cent a year, reflecting equivalent rises in productivity, while overall gross domestic product rose faster as the population expanded from 50m in 1951 to 63m in 2011.
Britain did not have a postwar German-style Wirtschaftswunder (or “economic miracle”) in the 1950s and 1960s, nor did it enjoy the US-style “great moderation” of inflation until a decade after the 1984 original. Although everyone got terribly excited by each new economic policy framework, the results are remarkably difficult to distinguish in the data.
Britain’s 1945 to 2007 economy is best described as volatile on the outside but fundamentally stable and boring. Yet since the financial crisis struck it has been having to get to grips with the uncomfortable truth that it can no longer rely on the future being like the past.
Instead of output per worker growing at roughly normal annual rates so that it is 10 per cent higher now than in 2007, productivity has fallen by a touch more than 4 per cent over that period. Of all the Group of Seven leading economies, the UK has had the greatest loss of output compared with the pre-2007 trend. The Office for Budget Responsibility estimates that citizens will have to wait until the end of 2014 for output to climb back to its 2008 peak, and Bank of England forecasts suggest Sir Mervyn King has next to no chance of leaving office as governor next summer with output higher than it was when his second five-year term started.
Having coined the phrase “nice decade” to describe the non-inflationary consistently expansionary economy he inherited in 2003, Sir Mervyn will struggle to disagree with Michael Saunders of Citigroup that Britain’s position is now “vile” with volatile inflation and less expansion. The dependable British economy of old is no more.
At times of change it is natural to cast about for precedents when other rich economies have experienced a sudden loss of fortune and fix on Japan. It experienced a drop in the average annual growth rate from 4 per cent in the 1980s to 1.1 per cent in the 1990s. Its lost decade or two appears to point the way to Britain’s future in 2013 and beyond.
The similarities extend from the raw economic numbers into the government budget. Five years into its crisis Japan’s public sector gross debt stood at 91 per cent of national income, before topping 230 per cent this year. Britain’s debt ratio has risen at a similar pace to 89 per cent this year.
And in the social sphere, the Japanese crisis coincided with a generation of youth without the advantages of their parents. Amid a loss of economic security, marriage rates plummeted and the proportion of unmarried adults aged 35-44 still living in the family home has marched ever higher, tripling from 1990 to exceed 16 per cent by 2010. It is no wonder Japanese fertility rates have dropped to alarming levels. Britain should not feel complacent here either with its higher fertility rates as it too is witnessing a surge in the proportion of young adults returning to live with their parents.
The similarities are stark, but I am far from persuaded that Japan is the best guide to Britain’s future. Instead of fearing a repeat of the post-bubble Japanese experience, Britain should look much closer to home – to Germany.
Once the 1990 reunification boom faltered, the federal republic also faced a much more difficult economic landscape, in which average annual growth rates per person declined from about 2 per cent in the 1980s to 1.3 per cent in the decade to 2006. Tight public finances required repeated doses of austerity and welfare reform. The reintegration of eastern Germany demanded a substantial contribution from taxpayers, just as dwindling North Sea oil production and the normalisation of banking requires the same in the UK.
But it is in the labour market where the German example points the way. Employment has continued to rise steadily in Germany and Britain even after the crisis, while Japan’s early-onset population ageing has led not only to a decline in the number of people aged 15-64 since 1990, but a fall in employment levels since 1997.
Productivity of the remaining employees is rising very quickly in Japan even as the economy crawls along, unlike in Britain and Germany. Women boost the labour force further in the two European economies and a greater acceptance of social change has resulted in about 9 per cent of employees in both Britain and Germany being foreign nationals, compared with 0.3 per cent in Japan. Regaining a competitive edge in Germany required years of wage restraint and meagre consumption growth, far below the levels to which West German workers were accustomed.
Since 2007 Britain has entered a low wage-growth era, where the news generated by minor industrial action on London’s Tube network after Christmas serves to highlight the harmony across the country’s workplaces, because a strike is now so unusual.
No one should be cheering the British economy’s parallels with Germany. Only five years ago, officials would look at Berlin’s efforts to reinvigorate its fortunes and sneer. Its economy is hardly exciting, but as a model of dealing with a sudden slowing, it is a better comparison and has achieved a better result than Japan. Britain need not fear 2013 and beyond.
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