Eurozone growth: Comparing the UK with Europe
As today's GDP figures confirm, the economies of Europe are now running on very different tracks, and a debate has started about which track Britain is heading down.
Having been in Germany yesterday, I must admit to being surprised to hear that Germany grew by 1.5% in the first quarter. Businessmen and economists I spoke to were upbeat, certainly, but not euphoric. Even with some encouraging recent growth in consumption, they know that the economy is still highly dependent on demand from the rest of the world. They are also hugely vulnerable (economically and politically) to what is happening further south, with today's figures showing Portugal shrinking by 0.7% and the Spanish economy now only 0.8% higher than a year ago (versus 5% larger in Germany).
Ed Balls this week berated the chancellor for continually comparing the UK to Greece, Portugal and Ireland, and not to our more traditional competitors like France or Germany. In response, George Osborne's team hit back yesterday by drawing attention to a new report from the IMF, which explicitly grouped the UK with Spain, Ireland and the others, as countries whose public finances had been relatively worse hit by the recession, and were therefore planning deeper cuts this year than countries such as Germany.
If you want to feel glum, you should follow Ed Balls and compare the UK with France and Germany. If you want to feel better off, I'd advise you to turn your gaze further south.
Which is the more appropriate yardstick? I leave that to you. But as I discussed with Evan Davis on the Today programme this morning, if you take a longer term view, the gloomy comparison with France and Germany is more nuanced.
Here are the facts: Germany grew more slowly than the UK for most of the first years of this century, with consumption growing, on average, by just 1% a year. As I have mentioned before, in terms of per capita GDP, Britain actually saw more growth in living standards, on average between 1998 and 2010 than Germany, and that's including the recession.
But with its slower growth, Germany also accomplished a lot of "roof-mending" and reforms to its economy that have left it well prepared for a strong recovery now. It did not build up the kind of imbalances in public and private lending that we did in the UK. And they did not rely on financial services for an increasingly large share of their growth (quite how large having been underlined in some interesting analysis in the FT this week.) By squeezing real wages in manufacturing, they actually enabled their world trade share to rise slightly, when it was falling for nearly every other country in Europe - catastrophically so, in the case of Greece and Portugal.
That, in large part, explains why Germany is now growing so much faster than the UK, after a similarly deep recession. And why Germany is also growing so much faster than the countries on the periphery.
France is a slightly different case. True, their latest GDP figures are also stunning. But by and large, their recovery has been fairly mediocre. In fact, the IMF forecast released yesterday has France growing by 1.6% in 2011 and 1.8% in 2012, versus 1.7% and 2.3% for the UK.
On the basis of today's figures, the French forecast may well get revised upwards. But they are not seeing the kind of bounce back that Germany has been enjoying - nor, even after today, are many economists expecting one. And there are increasingly disapproving noises being made in the markets about the state of France's public finances.
According to the IMF's latest Fiscal Monitor, when you add their 6% of GDP deficit to the public debt that needs to be rolled over this year, France will need to raise an amount equivalent to more than 20% of their national income from the financial markets in 2011. Even with our higher deficit, Britain's total financing need will be well under 16% per cent of GDP.
That's due to the exceptionally long maturity of our debt - which I have discussed many times before.
The more telling difference between the UK and France is that they had a much shallower recession than we did, with less than half the total decline in GDP, from peak to trough. Their recovery might not be so much better than ours, but they did have a much better crisis, with smaller consequences for the long-term level of national income.
In many ways, Ed Balls is right - Germany and France are the more natural economies for Britain to compare ourselves with. In more usual circumstances, I suspect that George Osborne would agree. But rightly or wrongly, the chancellor is focussed now on Britain's fiscal challenges, which are definitely not as grave as Greece or Ireland's but do have more in common with Spain than with Germany.
Like Spain, Britain did pretty well in the first years of this century but also allowed some serious imbalances to build up in its economy, with a property boom and an explosion in the amount of personal and financial sector debt. Thankfully, Britain's borrowing from the rest of the world did not come close - Spain's current account deficit in 2007 was more than 5% of GDP, twice as large as Britain's.
But, like Spain, we are now going through a difficult period of adjustment while those past imbalances get sorted out, one which will hopefully be made easier, in our case, by the fact that we still have our own currency. Germany did a lot of hard work before the crisis, and is now reaping the benefits. Whatever you think of Mr Osborne's fiscal strategy, most economists would agree that Britain, like Spain and the others, still has its hard work to come.