UK coalition and central bank have swerved a depression but recovery is still nowhere in sight

THE RECOVERY in Ireland’s largest trading partner is struggling to gain traction. Yesterday’s news that the British economy grew by a mere 0.2 per cent in the second quarter of the year was not unexpected, but it was disappointing.

It is the third consecutive quarter in which the underlying performance of the economy was stagnant or thereabouts. While we are well accustomed to it, Britons are just getting used to the jerk- and-thud feeling of bumping along the bottom.

There is much that has surprised about Britain’s recent economic performance. Among the less pleasant of these surprises has been the absence of an export bounce that might have propelled the economy on to an upward growth trajectory.

Such a bounce was more expectation than hope, given the sustained weakness of sterling.

At the very first rumblings of the financial crisis four years ago this summer, the pound began to slide vis-a-vis the euro and most other hard currencies.

As Britain’s economy is so dependent on London’s financial sector, the onset of the global credit crunch led to fears for its economic stability and hence a sell-off of sterling.

At one point towards the end of 2008, the pound had lost almost a third of its value against the single currency and approached parity. Although it recovered from that low point, it has remained weak.

Despite this, Britain’s export engine has managed only occasional splutterings. As the British balance of payments deficit with the rest of the world remains near record highs, the argument that it was just a question of time before the competitiveness gains of devaluation would feed through to the export numbers is past threadbare.

Less negatively, the British economy did not suffer as badly as it might have done in the post- Lehman crash, either in terms of output or employment.

Among the G7 economies, its performance by those indicators was only a little worse than average, despite having the most indebted households and the biggest financial system relative to GDP. These factors could have made the UK recession much deeper than most of the other big economies.

That recession did not turn to depression owes much to an extraordinarily accommodative fiscal-monetary mix. Both the government and the central bank put their respective pedals to the floor. This potent combination pulled the economy out of its nosedive in 2009, but it has not been enough to generate any real momentum behind recovery.

And, unlike most of the other G7 members, including the US, the British economy is still smaller than before the crisis started.

What to do?

Over the weekend, Vince Cable, the business secretary, called on the Bank of England to extend its money-printing programme, known as “quantitative easing” or, (more pronouncably) QE.

Independent central banks hate being harangued by politicians and Cable’s call risks being counterproductive – if the Bank of England’s decision on more QE is borderline, it may decide against for fear of giving the merest appearance of following the executive’s orders.

If the conduct of British monetary policy has been controversial, its fiscal stance has been subject to worldwide debate.

As the first G7 economy to move aggressively towards balancing the books, many economists, in Britain and abroad, have warned that the tightening is premature. Yesterday’s near-stagnant second quarter growth figures give some additional support to the fiscal doves.

From our narrow perspective, the weakness across the water has been bad for exporters. As the chart shows, Irish exports to Britain were on an upward trend from the second half of 2009 until the end of last year. They have since fallen back. It will take a stronger recovery in Britain to return them to the right track.