It's mostly the global economy, stupid

Perhaps, like me, you have become weary of the debate over the causes of the UK's current economic predicament. On the one hand we have those currently in charge blaming the global forces beyond their control; pandemics, Russia, energy markets, international recession and the like. On the other, those not in charge blame the incompetence of those who are. In the good times their roles reverse.

One thing both parties appear to agree on though is that output growth measures what they are arguing over. Setting aside the shortcomings of such a narrow focus, we have observations of the output growth of both the UK and global economy, so surely we could use these to help ground the debate?

How much of the observed variation in global growth that spills over into UK growth can be seen as a simple regression problem. When we do that regression using World Bank data from the turn of the century we find that 85 percent of the variation in UK growth is explained by what happened globally. However, we also find that the UK economy actually amplifies these variations in global growth by some 60 percent so that UK recessions are significantly worse than global recessions (Figure A). For example, in 2009 the financial crash caused global growth to fall by 4.7%/yr and the UK economy by 6.7 %/yr, while in 2020, covid19 caused global growth to fall by 6.7 %/yr and the UK's by 12.1 %/yr. In both cases, 85 percent of the drop in UK growth is simply explained by what happened globally, but with some amplification. Although that feels like vindication for those in power at the time, it also means they are unable to then claim much direct credit for growth in the good times. For example, 85 percent of the 7.2 %/yr growth the UK experienced post-pandemic in 2021 appears simply to follow global growth rebounding above trend to 5.6 %/yr (Figure A).

In future, when we hear British politicians trying to offload responsibility, take credit, or point the figure over economic performance, we should probably start by looking to see what the global economy is doing. Perhaps we should then ask what role we played in affecting global growth and why we are just so exposed to these winds. In the financial crisis we certainly should shoulder some responsibility for helping design and operate the financial architecture, and being so plugged into this most likely explains why those global winds blow so strongly here at home. Under covid19, it would be nice to think we played our role in shortening the pandemic and hence the timing of the subsequent global rebound. We could also now think of the UK economy as a bellwether for what is happening globally given the UK statistics tend to lead those of say the World Bank. If the UK economy is currently teetering on the edge of recession, an informed prediction for 2022-23 would be that global growth would be close to 2.0 %/yr, down by some 45 percent on its recession-free state of 3.4 %/yr.

Figure A. World Bank GDP growth rates 2000 - 2021. The regression is given by UK = 1.59(global)-0.03 (±95 percent confidence). 2.4 and 3.4 %/yr are the recession/rebound-free average growth rates.

Andrew Jarvis - January 2023