Home > Uncategorized > The British recovery. No conundrum there… (4 graphs)

The British recovery. No conundrum there… (4 graphs)

The British economy has not yet recovered in any meaningful sense of the word. Production per capita is not back to historical levels, private debts are still sky-high, the number of crappy jobs is increasing and productivity is about 7 to 8% below ‘trend’ (a downward adjusted trend, that is), which is of course consistent with the increase of crappy jobs. Also, according to the PSE

The percentage of households who fall below society’s minimum standard of living has increased from 14 per cent to 33 per cent over the last 30 years, despite the size of the economy doubling. This is one of the stark findings from the largest study of poverty and deprivation ever conducted in the UK. Other key figures reveal that almost 18 million people cannot afford adequate housing conditions; 12 million people are too poor to engage in common social activities; one in three people cannot afford to heat their homes adequately in the winter and four million children and adults aren’t properly fed by today’s standards …  full-time work is not always sufficient to escape from poverty.


* the British unemployment rate, though still high (anything above 5% unemployment is ‘high’) is only about half the Euro Area unemployment rate.

* employment as well as the employment rate are going up at a brisk pace, giving labourers more clout to negotiate real jobs (or, as things go, to switch to better jobs).

* and consumer expenditure is up, leading a genuine economic recovery!

Why is the British economy doing so  much better than the Eurozone economy? Below, some pieces of the puzzle: (1) the British devaluation, (2) the recent increase of household income and purchasing power and (3) inflation-led deleveraging and an associated fall in the savings rate.


All data courtesy of Eurostat and based upon the magnificent, stock-flow consistent system of national accounting.

(1) After 2008, the pound depreciated quite a bit, which led to a much lower domestic price level compared with the Euro area (graph 1).

The graph shows that external depreciation works much, much faster than Greek and Irish ‘internal devaluation’. But there is another and more important difference between internal and external devaluation: Internal devaluation depresses domestic demand while external devaluation does not depress domestic demand. See graph 2: wage income in Ireland and Greece showed disastrous declines.

Compensation employees

At the same time, a larger part of this demand will, in the case of external devaluation, be directed towards domestic goods and services as these get cheaper. Internal devaluation not only works much slower – but the disastrous decline of domestic purchasing power will also dwarf any beneficial consequences of the lower domestic price level.

Very important (and, for me, a mayor economic mind changer): according to the books, the decline of the domestic price level will also lead to an increase in exports. In reality, this does not happen, see the blogposts by J.W. Mason and the linked papers he links to about this. One reason for this is the fact that modern international trade is based on global instead of national production chains.

But a lower price level does seem to stimulate tourism, it seems that in all devaluating countries (internal or external), incoming tourism is by now a mayor growth sector (Estonia, Iceland, Greece, UK, whatever).

2) Between 2011 and 2013, nominal disposable income of Euro area households (i.e. net of tax, including mixed income of self-employed) increased with 1%. The comparable UK figure: +8%… (caveat: Eurostat does not mention 2013 UK data, I’ve extrapolated the UK data with the 3,2% increase of total wage income in the UK in 2013). This means, as British inflation is at this moment about as low as in the Euro Area, that British purchasing power is increasing much faster. As a consequence, retail sales show strong growth.


3) At the same time, the 2008-2011 inflation and nominal income growth led to quite some deleveraging of households, while (for better or worse) British house prices are increasing. This combination means that, at least in the short-term, balance sheet problems as experienced by households will loom less large (according to ONS, in 2013 the household savings rate declined from 7,1% to 5,1% of income, boosting demand).


The behavioural side of these effects seem to be simple: when nominal income increases – people will spend it. And they (as well as tourists!) will spend more on domestic products and services when the domestic price level (including wages) gets relatively lower. And people will save less and spend more when their balance sheets ‘improve’.

  1. June 20, 2014 at 1:59 pm

    Reblogged this on ..::popular spanish practices::.. and commented:
    and probably it will never recover, that is what you get when you take all jobs and all investments to Southeast Asia

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