A Journal of People report
The U.K. is facing the highest risk of a recession since the financial crisis and needs urgent plans to combat the next downturn, according to an alarming assessment of the U.K.’s economic health.
The National Institute of Economic and Social Research, one of the UK’s leading economic forecasters, said last week that the UK would only “narrowly avoid a technical recession”, with growth of 0.2% in the third quarter following a decline of 0.1% in the second quarter.
A technical recession occurs with two consecutive quarters in which the economy shrinks.
The decline of the pound, a widening current account deficit, and poor economic growth are also all worrying signs of what’s to come, according to the report “Failing to plan = Planning to fail” (J Smith, Failing to plan = planning to fail: The risk of recessions and the importance of macroeconomic policy in limiting the damage they cause, Resolution Foundation, July 2019) released on Sunday.
The report from Resolution Foundation, an independent research and policy organization, calculates that the past five recessions cost an average of one million jobs in the U.K. The last financial crisis would have been 12% worse, equivalent to 8,000 pounds ($10,000) per household, without a strong response from the British government and financial sector.
Today, the U.K. is far less prepared than in 2008 to deal with the consequences of a recession, the think tank said. The current economic climate has blunted tools such as slashing interest rates, quantitative easing, and cutting value-added tax.
The report raises the alarm over the potential impact on living standards, warning that the five previous recessions have produced an economic shock equating to a £2,500 loss for each household in the U.K. They have also increased unemployment by one million.
The report said:
“Globally, the economic outlook has clouded somewhat over the past two years. Trade tensions are elevated and the Chinese economy – the engine of so much international growth over recent decades – appears to be undergoing a structural slowdown. Most recently, the US Federal Reserve has indicated that it may need to loosen monetary policy in future if the growth outlook deteriorates further.
“That global picture has inevitable consequences for the UK, especially given the importance of trade to our economy. But the country faces domestic-specific pressures too. Most obviously, the uncertainty that exists around the UK’s approach to Brexit is having a clear impact on business confidence and investment in the near term. And longer term, the specifics of the UK’s future trading relationship with the EU and the rest of the world will have a direct read-through to the country’s economic prospects. In its most recent Article IV assessment of the UK economy, the International Monetary Fund (IMF) pointed to all of these pressures and more – including the possibility that UK households may seek to increase precautionary saving – as risk factors.”
According to the report, the risk of a recession is currently close to levels only seen around the time of past recessions and sharp slowdowns in GDP growth, and is at its highest level since 2007.
The U.K. economy, the report said, GDP has fallen by around four per cent on average from peak to trough. That’s equivalent to a hit today of around £2,500 per household. Similarly, the average rise in unemployment over past recessions equates to around one million people. There is of course much variation around this average, and in thinking about what effect the next recession might have on living standards, the potential scale of the downturn is clearly central. But so too is the way in which the economy adjusts to a new lower output equilibrium.
Recessions, the report said, can be triggered in a number of ways, with no two the same, and all of them bad. They often reflect developments abroad, though domestic circumstances can also be at play. What characterises recessions is a synchronised fall in spending across the economy. The economic pain caused by that fall in demand leads to higher unemployment (i.e. fewer hours of production), a drop in earnings (i.e. lower reward for each hour of work) or a combination of the two. When the bulk of that supply-side adjustment manifests as higher unemployment, the effects are concentrated on a small group (with clear distributional implications). When the pay takes most of the strain, it results in a more generalised sharing of the pain.
“Ahead of the next – potentially impending – recession, it is clear that UK policy makers do not have quite the same room for manoeuvre as they did ahead of the GFC [Global Financial Crisis]. On the fiscal side, this reflects the fact that the government’s debt-to-GDP ratio has soared from 35 per cent in 2007-08 to nearly 85 per cent in 2017-18. Cuts in the cost of borrowing mean the debt servicing burden remains relatively low, and there is no suggestion that the government is coming up against any critical constraint just yet – but the backdrop is at least less benign than the one that prevailed in 2008. On the monetary side the restriction is much more obvious. And it is one that is repeated across large numbers of advanced economies”, said the report.
The report said:
“With the current period of economic expansion long in the tooth and a number of risks already in clear sight, the UK faces a significant risk of experiencing a fresh economic downturn in the coming years. Given the costs associated with recessions and the evident impact of policy on reducing their impact, it is crucial therefore that we do all we can to ensure that our macroeconomic framework is recession ready – particularly in a period of apparent policy constraints. Put simply, if policy is not able to respond, a recession can become a depression. And history tells us that if policymakers make bad choices, they can make matters worse.”
About two years ago, another report said: U.K.’s economic model is “broken” and failing to generate rising prosperity for most of the UK population.
The major report by the IPPR’s Commission on Economic Justice argued that the U.K. economy requires a structural overhaul on the scale of the founding of the welfare state by Labour in the 1940s and the Thatcher rollback of the state in the 1980s.
Members of the IPPR’s commission, which was launched in November 2016, include Sir Charlie Mayfield of the John Lewis Partnership, Jurgen Maier, the boss of Siemens UK, the McKinsey managing partner Dominic Barton, the economist Mariana Mazzucato and the Archbishop of Canterbury, Justin Welby.
As evidence of the U.K.’s Britain’s broken economy the commission cited the fact U.K. GDP growth has decoupled from inflation-adjusted average weekly earnings, with the former rising by 12 per cent since 2010 while the latter has fallen by 6 per cent.
The commission also noted that the share of national income going to wages, as opposed to capital, has declined since the late 1970s.
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