Reprinted from: The Guardian
By, Larry Elliott
Before 2007, the UK was humming on the back of a borrowing binge. But though growth is returning, will the old system?
A s Dhaval Joshi of BCA Research noted last week, the UK has been the fastest-growing major economy in Europe over the past decade, even after its double-dip recession. The reason for that, though, was simple: Britain went on a borrowing binge.
At the start of the 1990s, the UK’s combined private and public sector debt amounted to 165% of GDP. By 2000, this had climbed to 200% of GDP. Over the next decade it rocketed to 295% of GDP.
It was this acceleration in the rate of growth of indebtedness, Joshi says, that provided the strong tailwind for the economy in the years before the financial crisis.
The problem, he adds, is that last decade’s tailwind has become this decade’s headwind. To receive the same boost from credit again, the UK’s debt-to-GDP ratio would need to accelerate again over the next decade, to 450% of GDP. That looks utterly implausible since the private sector is debt-sated and the government is aiming to cut its borrowing.
Seen in this light, the recent performance of the economy looks a lot more comprehensible. Deprived of the impulse it got from credit, the UK’s growth rate has fallen. There is nothing abnormal about quarter after quarter of virtual stagnation; the abnormal period was the pseudo-Ponzi scheme that went before.
Yet the Joshi analysis should be cause for sober reflection rather than deep depression.