Banking report: Counting the cost of the crisis

The government paid for the recession - now we're all paying for the recovery. If you think you've heard that before, you have; it's a line I've had to use a lot over the past few years, in explaining why growth in Britain and around the advanced economies continues to disappoint.

Today's report from the Independent Commission on Banking puts one number on it: it says that financial crises, on average, cost the British economy more than £40bn (in today's money) - or just over 3% of gross domestic product (GDP).

The authors think their proposed reforms will make these crises less likely, but will themselves cost households about £1-3bn, largely in the form of more expensive banking.

So, if the reforms work, you'd have to say they were a bargain (though the private costs of the reform to banks and their shareholders are expected to be higher - in the region of £4-7bn).

Robert Peston has been commenting at length on the contents of the report and its likely consequences.

I'm focused here on the long-term implications of this crisis which the ICB - and everyone else - would like not to repeat.

Wrong recovery

The surprising conclusion of a new study by the Institute for Fiscal Studies (IFS) is that the darkest days of the financial meltdown as far as the banks and the politicians were concerned, were actually relatively bright days for British households.

It was only after the economy started to "recover" that things started to go seriously wrong.

In fact, UK household incomes, after tax, grew just as fast between 2007-8 and 2009-10 as they did during the four years leading up to the crisis. This is the period we've been taught to call the boom years, but which was not actually that great.

That is true whether you look at the average UK household, whose net income grew by 1.2% a year, or the median household, exactly halfway along the income distribution, whose net income grew by 0.6% a year over both periods.

We don't have official household income data beyond 2009-10, but the IFS reckons that the median household will have seen its net income fall by 3.5%, in real terms, in the financial year 2010-11 - the largest annual drop since 1981.

As we know from the study the BBC commissioned from the IFS earlier this year, they expect this decline in living standards to continue until 2013-14, at least. That would make it one of the worse decades for living standards since World War II.

All of this helps explain why the recession of 2008-9 felt less bad to many who lived through it than the recession of the early 1980s, even though there was a similar fall in national output in both cases.

Especially in the lower half of the income distribution, households were insulated from the full effect of the recession by the fact that benefits and tax credits rose sharply in real terms during the downturn, and affect more of the population than they did in 1981.

They were also helped by the relative strength of the labour market: both jobs and hours fell significantly during the recent recession, but not nearly as far as they did in the 1980s.

Downbeat

But if the recession was not as bad as expected, the recovery has been a great deal worse.

Quite how much the upturn has disappointed - across the advanced economies - is brought out clearly in a new paper by HSBC, which looks at where the main economies are now and compares that with where forecasters expected them to be back in 2008.

This table has the key numbers.

Back in 2008, the consensus forecast among independent economists was that the US economy would now be nearly 8% larger.

In the case of the UK, they were expecting cumulative growth of more than 6%. By historical standards, those were pretty downbeat forecasts.

Now they look positively utopian. National income is now lower than it was in 2008 in every single one of the countries listed - and much, much lower than expected.

Looking at the table, you'll see that among the largest advanced economies, only Japan's recovery has been more disappointing than Britain's. Our economy is now 10% smaller than it was expected to be at this stage in the recovery - and the forecasts for 2011 and 2012 are now busily being downgraded.

The only consolation is that expectations for the US and the eurozone are falling even faster than in the UK. In the same report the HSBC economists slash their US growth forecast for 2012 from 2.9% to 1.7%, and the forecast for the eurozone from 1.4% to just 0.7%.

The 2012 figure for the UK has gone from 1.6% to 1.3%.

But that is not much consolation when these two regions between them account for the majority of our exports.

These are indeed disappointing times for the UK, and it's not good news at all that we are sharing our disappointment with our neighbours.