Nearly a decade after the 2008 financial crisis, the UK has still not returned to anything resembling economic “normality”. Though unemployment is at its lowest level since 1975 (4.0 per cent), real wage growth has fallen to just 0.1 per cent and earnings are not expected to return to their pre-crash peak until 2025 (workers are still £14 a week worse off than in 2007).
Productivity growth (output per hour worked), which averaged 2.3 per cent before 2008, has collapsed to just 0.4 per cent – a worse performance than any other major western economy.
Households are now spending around £900 more than they earn, with an overall deficit of £25bn (1.2 per cent) compared to a French surplus of 2.7 per cent and a German surplus of 5.1 per cent.
Though the Conservatives have long promised “sunlit uplands”, austerity is due to continue throughout this parliament even after the largest public service cuts since 1945. And yet for all the pain, the national debt stands at 85.2 per cent (compared to 60.2 per cent in 2009).
Interest rates were recently increased from 0.5 per cent to 0.75 per cent (their highest level since March 2009) but they remain at a near-record low. The pre-crash average of 5 per cent is now regarded as inconceivable.
The manufacturing sector, which Brexiteers boasted would be aided by the fall in the pound, is now officially in recession. And the trade deficit – the difference between what the UK imports and exports – has widened from £4.7bn to £8.6bn.
Yet Chancellor Philip Hammond was still able to recently boast that “the economy has grown every year since 2010”. This is true, but it is comparable to a flagging runner declaring that he has, at least, kept moving. Since 2010, the UK has endured its slowest economic recovery on record, and, in 2017, it was the worst-performing EU country.
But Hammond’s boast is disquieting for another reason: the UK is now due a recession (defined as two consecutive quarters of negative GDP growth). Britain has historically suffered one every eight to 10 years, and Brexit has merely heightened the risk.
And should the worst occur, the UK is desperately short of firepower. Unlike in 2008, when interest rates still stood at 5 per cent, dramatic cuts are no longer possible (rates are now just 0.75 per cent), and the Bank of England has already enacted £435bn of quantitative easing (electronically-created money used to purchase government bonds and other assets). The Tories’ favoured combination of “monetary activism and fiscal conservatism” would no longer be an option.
To avoid a lengthy recession or, worse, a depression, the UK would need to deploy the traditional Keynesian weapons of higher public spending and tax cuts. Unlike Eurozone economies, Britain can afford to borrow significantly more without fear of a surge in bond yields. It retains an independent central bank – able to act as a lender of last resort – and a long average debt maturity of 14 years. But even so, with national and household debt at present levels, Britain would be acting from a significantly weaker position than in 2008.
Labour has long signalled that its fiscal credibility rule – to eliminate the deficit on current public spending and to reduce debt as a share of GDP by the end of the parliament – would cease to apply in a crisis scenario.
The Tories, who have already abandoned their past commitment to achieving a budget surplus, would be forced to become Keynesian converts or accept a politically disastrous recession. Unlike in 2009, when the austerian right successfully defined the terms of debate, the left would have the chance to. But more than the political winners, what should give pause for thought is how many economic losers another crash could create.