Friday, October 24, 2008

Brown's Boom Busted

A one-legged boom

This morning's GDP figures make grim reading: as expected, the Brown boom has finally ended in bust, with a chunky 0.5% GDP fall in Q3.

It's a good moment to look back on the Brown boom and ask what drove it?

Over the whole period from 1997 Q2, GDP has grown by 35%, or 2.7% pa. Over the comparable 11 year period up to 1997 Q2, GDP grew by 32%, or 2.5% pa. So on the face of it, Brown's boom was bigger.

Except that, as we've blogged many times (eg here), Labour permitted an unprecedented immigration surge which increased our population by 3-4%. Adjusting for that means GDP per head (which is what matters) has grown by about the same under Labour as it did during the previous 11 years.

But when we look at the composition of growth we find a significant difference. Because under Labour, getting on for two-thirds of Britain's growth has come from Business and Financial Services. Those industries grew by an astonishing 5% pa, without which our overall growth rate would have been well under 1.5% pa*. In terms of our economic output, this was a one-legged boom.

Of course, under the Tories, Business and Financial Services also grew strongly, but by a much more modest 3.2% pa, accounting for 40% of overall growth. And note that 11 year period (1986 to 1997) encompassed the now demonised Big Bang.

So what precisely are these industries, which together comprise nearly one-third of the economy?

The good news is that it's much more than just those imploding banks and brokers. The bad news is that much of the rest - like legal services, accountancy, IT services, and real estate services - is heavily dependent on financial services and burgeoning debt. It is highly unlikely that the pain in financial services will not spill over, dragging them all down.

The reality is that Brown's boom was built on a group of industries that are now facing an Almighty bust.

*Footnote - Yes, I know there are some tricky technical issues in measuring the output of financial services. But all figures quoted here are the ONS's official GDP stats - they are our best estimate, produced by Britain's top statistical brains. It would be amazing if the big picture was wrong.


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