Thursday, 1 December 2011

Estimating the cost of the recession

How costly has the crisis been for the UK economy? One straightforward way of assessing that question is to look at the difference between where the economy would have been if the crisis hadn't happened and where it is today.

The Office of Budget(OBR) responsibility undertook this exercise as part of their work monitoring UK fiscal performance.   The blue line represents actual output per person for the UK economy.  In slightly simpler language, this is what UK workers, on average, produce in terms of goods and services.The red dotted line in the chart above represents the trend output per person. This is what we would have produced, given the part growth rates, assuming the recession had not happened. The difference between the two lines represents the cost due to the recession.

The answer according to the OBR appears to be about six percent. In other words, we would have been on average six percent better off if the crisis hadn't happened.

This is a large number.  However, the UK economy remains mired in difficulty.  The prospects for sustainable recovery seem bleak.  Over time, the cost of this crisis can only increase.

1 comment:

Anonymous said...

As is always with these things, it depends on how it was calculated.

If I spend 20 minutes on the phone to the bank, to get a loan, then buy a lathe from China, then spend 40 minutes putting the various bits on, then the output of this UK worker is a complex machine tool in 60 minutes.

The graph may just be indicating we're importing less and making more.