Britain's economy is a riddle, wrapped in a mystery, inside an enigma. And finally, six years later, it's an economy that's bigger than it was before the Great Recession.
Now, on the one hand, there's nothing puzzling about Britain's slow-motion recovery. It had a big boom, a big bust, and big austerity. Given all this, we would have expected it to take awhile for GDP to get back to its pre-crisis level. But this has been a lot longer than awhile. It's been the worst recovery on record, worse even than Britain's lost decade following its disastrous return to the gold standard in the 1920s. You can see just how bad it's been in the chart below from the National Institute of Economic and Social Research.
But here's the weird part: even though Britain's GDP has been stuck in a historic slump, its job market hasn't. In fact, it's been doing quite well. As you can see in the chart below from Chris Giles, Britain now has more full-time, more part-time, and more self-employed workers than it did in 2008. That's not what a weak recovery looks like.
It's been a tale of two recoveries, and it's not clear how to reconcile them. That's because there's usually a strong relationship—what economists call Okun's Law—between GDP and jobs. So either Britain's GDP numbers have systematically understated the size of its economy, or its workers have become less productive.
Now, the latter isn't as far-fetched as it sounds. A drop in productivity doesn't mean Britain's workers woke up one morning and forgot how to make as much stuff as before. Rather, it means that high-productivity sectors like finance and oil drilling are shrinking, and low-productivity sectors like self-employment are growing.
In any case, Britain's recovery isn't GDP-less anymore. Its economy is growing at a 3.2 percent annualized pace, better than almost every rich country. It shows that a little less fiscal austerity, a little more monetary stimulus, and a lot of time can heal all wounds—or something like that. The only problem is that Britain's economy looks uncomfortably like it did during the bubble years—especially when it comes to debt. Households didn't deleverage much after the crisis, and now they're spending again. Housing prices, particularly in London, are booming again. And the country as a whole is borrowing too much from the rest of the world again.
But hey, maybe this time will be different.