Source: Bloomberg, NBER with Netwealth calculations
The UK’s recovery, too, has been long and slow. Of the 39 quarters so far in the decade, the economy has only shrunk in three: in the second and fourth quarter of 2012 and the second quarter of 2019. Looking back at the data, however, does not tell the full story.
The decade began with considerable uncertainty, and there was a fear of a triple dip recession, the data then showing the economy had already suffered two dips in the aftermath of the 2008 crisis. In the event, new data led to the initial recession to be seen as deeper and longer, the second dip thus disappeared and the fears of a third dip that marked the start of the teens was gone.
A decade defined by low productivity growth
Just as growth has been low, so too has been productivity growth. This was in sharp contrast to the period ahead of the financial crisis. We finish the decade with it widely acknowledged that it is now more important than ever to address the UK’s low productivity.
Over time, productivity helps determine an economy’s longer-term performance and high productive economies have higher output and living standards, being able to work less, or pay ourselves more, or both. We need to see higher investment and innovation as part of the process to achieve this.
A robust jobs environment
While output has been modest, a strong positive has been the unemployment trend. After peaking at 8.4% in December 2011, following the legacy of the global recession, the unemployment rate has since fallen steadily, to its current 3.8%. However, intense competitive pressures, at home and from overseas, has contributed to modest wage growth.
It is only recently that wage growth has trended higher, helping underpin consumption. However, the decade also witnessed two sustained periods of a squeeze on real incomes and personal consumption as inflation rose temporarily in response to sterling depreciation.
Sterling fell both in the wake of the 2008 global financial crisis and also following the 2016 Referendum. As a result, UK inflation experienced twin peaks during the decade. It peaked at 5.2% in September 2011, contributing at that time to a ‘cost of living squeeze’. Inflation subsequently peaked at 3.1% in November 2017. In between it reached a low of -0.1% in August 2015. For the decade as a whole, though, inflation averaged 2.1%, not far from its 2% target.
Monetary policy as shock absorber
Unorthodox has been the hallmark of macro-economic policies over the last decade. Against this economic backdrop, monetary policy has been the shock absorber for the global economy. For the UK, policy rates have not moved much but they have stayed low, starting the decade at only 0.5% and staying there until being cut to 0.25% in 2016 and then rising to 0.5% in 2017 and 0.75% in 2018.
The Bank of England, too, shared in other proactive measures such as quantitative easing (QE). Overall, as we have said previously, monetary policy globally can be thought of as synchronised, sizeable and successful in the aftermath of the problems of 2008. Perhaps, not surprisingly, markets have reacted well to this approach. Ten year gilt yields began the decade close to 4% and have trended down, following an erratic path, and although off their lows, are only 0.76% now. The FTSE 100, meanwhile, has risen from 5,412 to close at 7,525 on December 17.
Tackling the budget deficit
Fiscal policy has occupied central stage over the last decade. The budget deficit peaked in 2009-10 at £158 billion, or 10.2% of national income. It has trended down since. Part of the challenge in the UK has been that in good times the economy has not run budget surpluses and so since 1970-71 there have been only six years of surplus.
Thus, when the economy was hit and the budget deficit rose, fiscal policy became geared to bringing the budget deficit under control. This could not prevent a ballooning of the national debt, and also led to a political focus on the costs of austerity. This figured prominently as an issue in the first three of the four elections of the decade in 2010, 2015 and 2017 but by this year’s election the attention, quite sensibly, was on taking advantage of low bond yields to justify future infrastructure spending and help to both level up and reboot the economy.
The role of unconventional politics
Whereas the last years of the 2000-09 decade were characterised by an economic and financial crisis, the final years of this decade witnessed political turmoil, unorthodox by recent historical standards. The most significant event was undoubtedly the June 2016 Referendum, and the vote to leave the EU.
Of the 12 regions of the UK, three voted to remain (Northern Ireland, Scotland and London) and nine to leave (Wales and the eight regions of England outside of London). This regional breakdown, too, helps explain much of the political debate and turbulence since.
The aftermath of the Referendum and three elections in four years (2015, 2017 and 2019) reflected a period of historic political turmoil that appears to have been finally resolved by the emphatic Conservative general election victory in the last month of the decade. The UK will now leave the EU, although worries about the union within the UK may persist.
We end the decade, with a focus on whether the newly elected government will be able to achieve economic success and political stability. This will require a good future relationship with the EU and also addressing our domestic agenda and positioning the UK to succeed in a changing and growing global economy.
Who knows, but in ten years’ time we may be talking, again, about the roaring twenties.
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