Prospects for UK growth in the aftermath of the financial crisis

Introduction The UK economy went into recession in 2008Q2. GDP fell in that quarter and continued falling for the next five quarters. It stopped falling in 2009Q3 and began growing again, but so slowly that in 2013Q1 its level was still 4% below the previous peak in 2008Q1 (see Table 1.1). The fall in GDP per capita has obviously been even larger, since the population has continued to grow. The whole period since 2008Q1 therefore justifies the term ‘slump’ or even ‘depression’. Few if any commentators expected a slump of this severity prior to its start. After it became apparent that the recession, though deep, was over, many expected the recovery to be equally rapid. But this didn’t happen. The recovery has been slow and is still incomplete. There have been many surprising features of the five or so years since the recession began. First, despite the massive fall in output, unemployment rose comparatively modestly from 5.2% in 2008Q1 to a high of 8.4%; in September-November 2013 it was 7.1%. Second, employment and total hours worked, after falling initially, have been robust: employment and hours are both now higher than at the peak (Figures 1.1 and 1.2). The flip side of these facts is the productivity puzzle: not only has labour productivity (whether measured on an hours basis or a heads basis) stopped growing, its level has actually fallen. In 2013Q1 GDP per hour worked was still 5% below its peak level (Figure 1.4). All this calls into question the future prospects of the UK economy, which seemed so bright during the boom. Was it all just an illusion? This is the question on which I hope this chapter will throw some light. In 1995 I published an article with the somewhat sceptical title ‘Supply side reform and UK economic growth: what happened to the miracle?’ (Oulton, 1995). I argued that up till the end of the 1970s the growth of the British economy had been hampered by two factors: first, our dysfunctional system of industrial relations and second a low level of investment in human capital. Despite the title, my conclusion was upbeat