Was Northern Rock the worst of it?

IPPR chief economist Howard Reed ponders our economic prospects f

The economic prospects for the UK and other countries in the developed world look bleaker now than they did twelve months ago. For some time there has been wide consensus that the global economy was in an unsustainable financial bubble characterised by inflated house prices and high levels of consumer and corporate debt, but no-one knew when the bubble would burst.

In retrospect the wave of US ‘sub-prime’ lending defaults which gathered pace in Summer 2007 looks like the bursting point. The sub-prime crisis has precipated a global credit crunch, as the ready availability of credit and debt which characterised the decade so far has been replaced pretty much overnight by an extreme reluctance among financial institutions to lend at anything below punitive rates. The Northern Rock crisis which emerged in the summer is a direct consequence of that changed financial climate.

But was the Northern Rock crisis the worst that’s going to happen to the UK in this business cycle, or are there even tougher times ahead?

Six months ago recession in the UK and US was being mentioned as an outside possibility, but now it looks much more likely. Since the summer, each successive release of business forecasts and economic data on employment and output growth from the US has been more pessimistic. And now, increasingly, UK data is following suit – for example, recently released Christmas sales figures from several leading retailers were well below market expectations.

We are now at the stage where Goldman Sachs and Morgan Stanley (for example) believe a US recession is the most likely outcome in 2008, even though central banks in the US and Europe have lowered interest rates and injected extra funds into the system in an attempt to loosen credit markets.

Given the interconnection between US sub-prime lenders and UK and European banks stems from the widespread repackaging and reselling of debt, if the sub-prime crisis blows a big hole in the US economy it is very likely to take Europe – including the UK - down too.

If the UK economy does go into recession this year, the effects are likely to resemble the most recent recession of 1990-92 more than the slump of the early 1980s, because circumstances were more similar in the early 1990s – a bubble had developed in housing and asset markets in the UK, US and Japan which burst in 1990, leading to a substantial fall in property prices.

By contrast, the early 1980s recession was precipitated by the oil price rise of 1979, but its longevity and severity were more a consequence of a huge shake-out in UK industry and a structural shift away from manufacturing and towards services – particularly financial services and the City.

It does not look like we are poised for big structural shifts in the economy this time round and London’s status as a world financial centre should survive any recession. But the UK’s reliance on the financial services sector makes it particularly vulnerable to the credit crunch in the short term.

Fortunately however, inflationary pressures are much weaker at present than they were in the early 1990s or early 1980s, so we are unlikely to see interest rates at the exceptionally high levels that we saw back then – which should assist economic recovery.

Another point of difference from the early 1990s is that the US economy is being hit hardest by the current slowdown.

Previously the resilence of the US economy has been a valuable catalyst for revival from global economic crises, but this time around, the US looks in much worse shape with high ‘twin deficits’ in the personal and government sectors.

Thus, global economic recovery will be more reliant than ever before on a strong growth performance by China, India and other industrialising powerhouses. In the medium term this is likely to lead to a change in the balance of global economic power, with the end of US hegemony and greater uncertainty over the direction of global economic policy than we have known for the past fifteen years.

In the longer run, shortages of water, oil and other natural resources, and the climate effects of spiralling greenhouse gas emissions, are a greater threat to long-term economic growth than any short-term financial imbalances.

Howard Reed is Chief Economist at the Institute for Public Policy Research

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The New Times: Brexit, globalisation, the crisis in Labour and the future of the left

With essays by David Miliband, Paul Mason, John Harris, Lisa Nandy, Vince Cable and more.

Once again the “new times” are associated with the ascendancy of the right. The financial crash of 2007-2008 – and the Great Recession and sovereign debt crises that were a consequence of it – were meant to have marked the end of an era of runaway “turbocapitalism”. It never came close to happening. The crash was a crisis of capitalism but not the crisis of capitalism. As Lenin observed, there is “no such thing as an absolutely hopeless situation” for capitalism, and so we discovered again. Instead, the greatest burden of the period of fiscal retrenchment that followed the crash was carried by the poorest in society, those most directly affected by austerity, and this in turn has contributed to a deepening distrust of elites and a wider crisis of governance.

Where are we now and in which direction are we heading?

Some of the contributors to this special issue believe that we have reached the end of the “neoliberal” era. I am more sceptical. In any event, the end of neoliberalism, however you define it, will not lead to a social-democratic revival: it looks as if, in many Western countries, we are entering an age in which centre-left parties cannot form ruling majorities, having leaked support to nationalists, populists and more radical alternatives.

Certainly the British Labour Party, riven by a war between its parliamentary representatives and much of its membership, is in a critical condition. At the same time, Jeremy Corbyn’s leadership has inspired a remarkable re-engagement with left-wing politics, even as his party slumps in the polls. His own views may seem frozen in time, but hundreds of thousands of people, many of them young graduates, have responded to his anti-austerity rhetoric, his candour and his shambolic, unspun style.

The EU referendum, in which as much as one-third of Labour supporters voted for Brexit, exposed another chasm in Labour – this time between educated metropolitan liberals and the more socially conservative white working class on whose loyalty the party has long depended. This no longer looks like a viable election-winning coalition, especially after the collapse of Labour in Scotland and the concomitant rise of nationalism in England.

In Marxism Today’s “New Times” issue of October 1988, Stuart Hall wrote: “The left seems not just displaced by Thatcherism, but disabled, flattened, becalmed by the very prospect of change; afraid of rooting itself in ‘the new’ and unable to make the leap of imagination required to engage the future.” Something similar could be said of the left today as it confronts Brexit, the disunities within the United Kingdom, and, in Theresa May, a prime minister who has indicated that she might be prepared to break with the orthodoxies of the past three decades.

The Labour leadership contest between Corbyn and Owen Smith was largely an exercise in nostalgia, both candidates seeking to revive policies that defined an era of mass production and working-class solidarity when Labour was strong. On matters such as immigration, digital disruption, the new gig economy or the power of networks, they had little to say. They proposed a politics of opposition – against austerity, against grammar schools. But what were they for? Neither man seemed capable of embracing the “leading edge of change” or of making the imaginative leap necessary to engage the future.

So is there a politics of the left that will allow us to ride with the currents of these turbulent “new times” and thus shape rather than be flattened by them? Over the next 34 pages 18 writers, offering many perspectives, attempt to answer this and related questions as they analyse the forces shaping a world in which power is shifting to the East, wars rage unchecked in the Middle East, refugees drown en masse in the Mediterranean, technology is outstripping our capacity to understand it, and globalisation begins to fragment.

— Jason Cowley, Editor 

Tom Kibasi on what the left fails to see

Philip Collins on why it's time for Labour to end its crisis

John Harris on why Labour is losing its heartland

Lisa Nandy on how Labour has been halted and hollowed out

David Runciman on networks and the digital revolution

John Gray on why the right, not the left, has grasped the new times

Mariana Mazzucato on why it's time for progressives to rethink capitalism

Robert Ford on why the left must reckon with the anger of those left behind

Ros Wynne-Jones on the people who need a Labour government most

Gary Gerstle on Corbyn, Sanders and the populist surge

Nick Pearce on why the left is haunted by the ghosts of the 1930s

Paul Mason on why the left must be ready to cause a commotion

Neal Lawson on what the new, 21st-century left needs now

Charles Leadbeater explains why we are all existentialists now

John Bew mourns the lost left

Marc Stears on why democracy is a long, hard, slow business

Vince Cable on how a financial crisis empowered the right

David Miliband on why the left needs to move forward, not back

This article first appeared in the 22 September 2016 issue of the New Statesman, The New Times