As London prepares for another display of British pageantry and good humor to match the unlikely triumph of last month’s rain-sodden Royal Jubilee, a less impressive aspect of Britain’s stoical “stiff upper lip” may detract from the national pride associated with hosting the Olympics. In the global race out of recession, Britain has just been revealed as a prime contender for the wooden spoon.
Not only was the shocking drop of 0.7 percent in Britain’s second-quarter GDP reported on Wednesday much bigger than investors and independent economists had expected but it almost matched the 0.8 percent fall in Italy’s GDP the previous quarter. And that Italian drop holds the record for the biggest quarterly contraction suffered by any G7 country since the immediate aftermath of the Lehman crisis. Much more important than such statistical trivia is the fact that Britain’s economic output is still 4.5 percent below the peak level it reached in the first quarter of 2008, more than four years ago. The U.S. and German economies, by contrast, are now significantly bigger than they were before the crisis and, in this sense at least, have left the recession behind them. And even the euro zone as a whole, despite the severity of its financial crisis, has done much better than Britain, with GDP just 2 percent below its peak in 2008.
National economic performance is not, of course, a competitive Olympic sport, and there is more to economic success than GDP growth. Still, there is a good reason for connecting the Olympics with economics: International competitions and comparisons can teach useful lessons and create incentives to improve economic management.
The most instructive international comparison at present is between the British and American efforts to clamber out of recession and financial crisis. This race is about as close as economics can get to a controlled experiment of the kind favored by natural scientists, in which sharply different policies are applied to two countries with broadly similar structures and initial conditions, facing similar economic problems.
In 2008, the U.S. and Britain were two advanced economies with large financial sectors, dangerous housing bubbles, heavy consumer debt and similar government deficits and debt levels relative to GDP. Both suffered extremely severe banking crises that forced their governments to take on huge additional liabilities by guaranteeing their biggest banks. For two years after the Lehman crisis in September 2008, the two economies followed broadly similar policies: slashing interest rates to zero, allowing large expansions of their budget deficits and financing the resulting debt with newly printed money. The two economies moved closely in tandem, as economic theory would have predicted: both on the way down until mid-2009 and then on the way up until mid-2010.