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Fears that the financial crisis will have a significant negative impact on long-term UK economic growth are unfounded, according to the results of a new survey that brings together views from a broad range of economists.
The first poll by the Centre for Macroeconomics asked just two questions, albeit meaty ones: on the size of the output gap and on the long-term effect on growth rates from the financial crisis. The responses, from economists in the City, at thinktanks and universities, provide more food for thought over the permanence of the drop in GDP over the downturn.
Economists were divided down the middle when asked whether they agreed the output gap – a measure of how far the level of output is below the potential level of output of the economy – was 3% or larger (in other words more than the Office for Budget Responsibility estimates). According to the OBR, the output gap in the last quarter of 2013 was 1.7%. That estimate implies that the drop in GDP relative to its pre-crisis trend, which may be as much as 10% on some estimates, is for the most part permanent.
In this survey, 46% of the respondents either agreed or strongly agreed the output gap was noticeably larger than the OBR estimate, among them Jonathan Portes of the NIESR thinktank and Morten Ravn from University College London. An equal number disagreed or strongly disagreed, and many of those commented that they supported the OBR estimate.
On the second question, over the extent of long-term damage from the crisis, the economists were not as divided. Almost two-thirds (61%) thought that the financial crisis will either have no effect on long-term UK growth rates or a small negative effect that pushes GDP down by less than 2.5% in total over a 10-year horizon.
But among those who disagreed with that view, several highlighted losses in the financial sector that may be felt for many years in the wider economy. George Buckley at Deutsche Bank and John Driffill at Birkbeck College, London, both commented that growth before the financial crisis was unsustainable and that the financial crisis therefore could have an impact on growth rates by bursting that bubble.
The Centre for Macroeconomics (CFM) – a partnership between the University of Cambridge, the London School of Economics (LSE), University College London (UCL), the Bank of England and the National Institute of Economic and Social Research (NIESR) – hopes its monthly reports will give a more comprehensive picture of the views of different economists and include the views of those experts "whose opinions are not frequently heard in public debates." It hopes to tackle issues such as Scottish currency union, the inflation target and top tax rates over coming months.
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