The UK, together with the US, was one of the countries most severely hit by the 2008–09 crisis because of the size of its financial sector, which accounted for approximately 9 per cent of total output in 2008.4 Yet it has recovered relatively quickly (see Figure 1, Panel A). Between 2010 and 2015, real GDP growth in the UK averaged 2 per cent, slightly above the average rate of growth for the G7 as a whole.5 In contrast, real GDP growth in the eurozone averaged 0.9 per cent over the same period.6
This year the IMF expects the UK to grow at a slower pace of 1.8 per cent, down from 2.2 per cent in 2015, because of the impact of Brexit. Even so, that would still be broadly on a par with an expected expansion of 1.7 per cent in the eurozone (down from 2 per cent last year).
Figure 1: Real GDP
Figure 1: Real GDP
Although our focus is not to examine in detail the causes of slow growth in the eurozone, it should be stressed that the performances of the currency union’s major economies have varied (see Figure 1, Panel B). Indeed, this has been one of the causes of the political deadlock between creditor and debtor countries, which prevented more accommodative macroeconomic policies from the outset. It also delayed sorely needed moves towards a more complete monetary union (for instance, the establishment of a common treasury and fiscal policy). A short discussion of these divergences is contained in Box 1.
Box 1: Divergences in the eurozone
The global financial crisis and its aftermath – the 2010–12 sovereign debt crisis in Europe – exacerbated existing structural weaknesses in Europe’s currency union and exposed deep policy mistakes, the correction of which required painful adjustments that adversely affected GDP growth and employment. For example, the convergence of interest rates across the eurozone in the pre-crisis years resulted in too accommodative monetary conditions in some eurozone countries, leading to unsustainable credit growth and excessive indebtedness. In Spain, for example, the household gross debt-to-income ratio peaked at 134 per cent in 2007,7 with the bulk of this debt ultimately financed abroad as the country had been running large current-account deficits. While this supported high levels of consumption, investment and government spending – and ultimately strong GDP growth – in the years before 2008, it also meant that Spain needed to go through a painful process of deleveraging after the financial crisis hit. This was reflected in a massive decline in (mostly residential) investment and a sharp drop in gross imports (see Table 1).
Italy’s comparatively weak output has a longer history, mostly because potential growth was (and still is) anaemic as a result of many factors, including structural rigidities in product markets and poor governance in banks and local governments. Although the country was never exposed to an acute real estate and banking crisis on a par with that of Spain, slow or absent growth has meant that the economy has been in decline ever since the crisis hit. As a result, consumer and business confidence has been low and domestic demand – both household consumption and business investment – persistently weak. Export growth has failed to compensate, in part because Italy has missed globalization opportunities. Although the country’s current account is currently in surplus,8 this partly reflects the drop in imports associated with weak domestic demand, as well as some export resilience.
Germany, by contrast, has been able to benefit from growth in both domestic and external demand. This reflects the fact that, when the crisis hit, its economy was not overleveraged (having just worked off the excesses of its post-unification boom) and had become more competitive as a result of labour market reforms.9 The economy’s production structure was also well placed to benefit from growing demand in emerging markets.
France is somewhere between these extremes: domestic demand held up relatively well after the crisis, helped by comparatively supportive financial conditions (as France escaped the sovereign debt crisis despite persistent fiscal deficits) and thus a comparatively less severe fiscal policy.
Table 1: Post-crisis recovery by GDP component (Cumulative changes between 2008 and 2015 as a percentage of 2008 levels, at 2010 constant prices)
|
GDP |
Household consumption |
Government consumption |
Gross fixed capital formation |
Gross exports of goods and services |
Gross imports of goods and services |
|
|---|---|---|---|---|---|---|
|
UK |
7.7% |
4.7% |
7.3% |
5.6% |
10.4% |
14.3% |
|
Eurozone |
0.9% |
-1.6% |
5.2% |
-11.9% |
18.7% |
12.8% |
|
Germany |
6.3% |
6.5% |
6.5% |
4.9% |
13.2% |
23.5% |
|
France |
3.7% |
4.7% |
10.8% |
-5.2% |
18.5% |
20.4% |
|
Italy |
-7.3% |
-5.3% |
-4.2% |
-27.5% |
6.7% |
-3.4% |
|
Spain |
-4.4% |
-8.2% |
0.4% |
-26.6% |
22.1% |
-7.4% |
Source: OECD.Stat (2016), ‘Gross domestic product (GDP)’, https://stats.oecd.org/index.aspx?queryid=60702 (accessed 5 Oct. 2016).
A breakdown of GDP growth by expenditure component (Figure 2) underlines the differences between the UK and the eurozone. In the period before the financial crisis private consumption contributed more to total output growth in the UK than it did in the eurozone.10 This remained broadly the case after the crisis, notwithstanding a sharp correction in UK household consumption in 2009 in particular.
That private consumption has been, and continues to be, a more powerful driver of GDP growth in the UK than in the eurozone is also reflected in much faster growth in services activity (10.3 per cent since 2011 in the UK, versus 2.8 per cent in the eurozone).11 As can be inferred from Figure 2, between 2000 and 2008 increases in the consumption component of UK GDP accounted for over two-thirds of the country’s total GDP growth in every year but one. Equally striking is how much the decline in household consumption contributed to the UK’s downturn in 2008–09 – a result of rapid household deleveraging, as we will see below. Coming out of the crisis, it took some time for consumption to resume its role of growth driver, but since 2012 it has clearly done so.
Figure 2: Contribution to real GDP growth by spending category
Figure 2: Contribution to real GDP growth by spending category
The picture is somewhat different for investment. In the eurozone before 2008, fixed capital formation (i.e. investment in assets such as factories or equipment) exhibited a somewhat stronger contribution to growth than it did in the UK. However, the situation was reversed after the global financial crisis – in part as heightened economic uncertainty and credit crunches in eurozone countries during the subsequent sovereign debt crisis discouraged investment (see Figure 2 and Box 1). The rebound in investment in the UK has been striking, and much more powerful than in the eurozone. Capital spending on fixed assets grew twice as fast in the UK in 2014 as it did in 2006. In contrast, such investment has been much slower to recover in the eurozone, and so far its growth has failed to return to its pre-crisis trend.
The domestically driven pattern of growth in the UK is also illustrated by the fact that net exports of goods and services mostly made a negative contribution to overall GDP growth throughout the pre- and post-crisis periods (the exception being during the crisis itself). In contrast, net exports in the eurozone have on balance made a positive contribution to growth throughout the past 16 years. This was especially evident during the 2010–12 sovereign debt crisis, when imports collapsed in the most severely affected euro member economies.
In sum, while household consumption was the UK’s prime growth driver pre-crisis, both investment and consumption played important parts in the post-crisis recovery. Net exports, meanwhile, have continued to subtract from real GDP growth, as was also largely the case before 2008. Only during the crisis period and its initial aftermath did external trade significantly drive UK growth, probably due to the scale of the consumption crunch that occurred at the same time.
4 Ibid.
5 IMF (2016), World Economic Outlook Database, October 2016, http://www.imf.org/external/pubs/ft/weo/2016/02/weodata/weorept.aspx?pr.x=67&pr.y=11&sy=2008&ey=2016&scsm=1&ssd=1&sort=country&ds=.&br=1&c=112&s=NGDP_RPCH&grp=0&a= (accessed 7 Oct. 2016).
6 IMF (2016), World Economic Outlook Database, October 2016, http://www.imf.org/external/pubs/ft/weo/2016/02/weodata/weorept.aspx?sy=2008&ey=2016&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=48&pr1.y=4&c=163&s=NGDP_RPCH&grp=1&a=1 (accessed 7 Oct. 2016).
7 Eurostat (2016), ‘Household Debt to Income Ratio’, http://ec.europa.eu/eurostat/about/overview (accessed 5 Oct. 2016).
8 Bank of Italy (2016), ‘Current Account, Balance’, https://www.bancaditalia.it/statistiche/index.html (accessed 5 Oct. 2016).
9 The Hartz reforms were enacted between January 2003 and January 2005. Named after Peter Hartz, the chair of the Committee for Modern Services in the Labour Market, they cut welfare and unemployment benefits and introduced new programmes aimed at getting the unemployed into work. Gaskarth, G. (2014), The Hartz Reforms … and their lessons for the UK, London: Centre for Policy Studies, https://www.cps.org.uk/files/reports/original/141024133732-TheHartzReforms.pdf (accessed 5 Oct. 2016).
10 Of course, a breakdown by country would show differences in the growth of consumer demand in the main eurozone economies – differences due more to cyclical factors such as low interest rates and credit growth (e.g. in Spain) than to structural factors.
11 OECD.Stat (2016), ‘Gross domestic product (GDP)’, https://stats.oecd.org/index.aspx?queryid=60702 (accessed 5 Oct. 2016).