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Britain's Unimpressive and Dysfunctional Recovery

25/07/2014 12:22 BST | Updated 24/09/2014 10:59 BST

Hurrah: the British economy is now bigger than it was before the crisis! We're doing much better than our critics predicted and better even than our competitors. It's yet more proof that our austerity policies were right all along. Vote Conservative next year.

That will be the essence of George Osborne's message following the release of new GDP figures this morning, which show that the economy grew by 0.8% in the second quarter. Some people seem to believe him: the government's reputation for economic competence has risen, and with it the Conservatives' poll ratings. Yet it is a travesty of the truth.

Start with the raw numbers. Even after the spurt of growth over the past year or so, the economy is doing worse than it did during the Great Depression of the 1930s. Britain's performance is also poorer than that of France, which Tory Party chairman Grant Shapps rubbished as having been "run into the sand". It's pathetic compared to Sweden, which got through the crisis without bailing out its banks: its economy is now up 7% since early 2008. And don't even mention Switzerland and the United States. Even though they suffered banking crises as devastating as Britain's, their economies have also since grown by as much as Sweden has. So by international standards, Britain is a flop, not a success.

While the level of economic activity is an abstract number for most people, your wages are not. And on that score, the situation remains dire. Since the crisis struck, average wages have fallen by nearly a tenth, after allowing for inflation - and more than half of that loss of income has taken place since Osborne took over. Contrary to the government's claims that this terrible trend has now been reversed, real wages are still falling. Overall, a typical household - one that is richer than half of the population and poorer than the other half - is no better off than a decade ago. While economic growth ought eventually to filter through into higher wages, most people will be worse off in 2015 than they were when this government took office in 2010.

The claim that the long-delayed recovery is a vindication of austerity is also spurious. Osborne applied a big fiscal squeeze in his first two years in office: the economy duly tanked. He then eased off the pace of austerity - and the European Central Bank ended the panic that threatened to destroy the euro and drag Britain and the rest of the world economy down with it - and the economy stabilised. As Paul Krugman has pointed out, if you stop banging your head against a wall, you feel better; it doesn't mean banging your head against a wall is a good idea.

Even so, surely things can only get better from now on? Actually, no. The recovery is dangerously dysfunctional, because instead of fixing the two biggest flaws in the British economy - its broken banking sector and its rigged property market - Osborne is relying on them to deliver a pre-election boom.

Back in his second budget speech in 2011, he wisely called for a "march of the makers": a revival of manufacturing, investment and exports. Yet manufacturing output is now 8.6% lower than its 2008 peak, investment is still 17.7% lower than its 2008 peak, and exports have fallen, despite the devalued pound. Exports have been so weak that Britain is borrowing record amounts from foreigners - a whopping £73.7 billion in the year to March - leaving it dangerously exposed to any swings in fickle market sentiment.

So far, the recovery has been driven primarily by consumers saving less and spending more against the backdrop of yet another debt-fuelled housing bubble. While banks are still cutting credit to businesses, they are happy to lend against the bogus security of inflated house prices, with the government's Help to Buy guarantees providing a further subsidy. Far from a march of the makers, it's a flight of the speculators.

The spending splurge and housing bubble are likely to last long enough to create an artificial high - at least for property owners - going into the next election. But we all know how bubbles end: with a bust.

To generate lasting shared property, we need to fix the banks, crack open the property market and make our economy more Adaptable, Dynamic and Decent through reforms that ADD UP. My new book, European Spring, explains how.