The British economy, Philip Hammond boasted today, “has grown every year for the past nine years”. 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 the outlook is merely worsening.
In quarter four of 2018, GDP grew by just 0.2 per cent (down from 0.6 per cent in Q3 and far below the pre-crisis average of 0.7 per cent), while in December it contracted by 0.4 per cent (as new Office for National Statistics figures show). Annual growth for 2018 was 1.4 per cent, the weakest since 2012. Manufacturing has now contracted for six months in a row, while business investment has fallen for the last four quarters.
By historic standards, the UK is due another recession — defined as two consecutive quarters of negative GDP growth — and Brexit (and a global trade war) have merely heightened the risk. An already weak economy — too unbalanced, too unproductive and too unequal — now faces the threat of a painful rupture with its largest trading partner. The surge in exports promised by Brexiteers — following sterling’s sharp depreciation — has not occurred but the fall in investment warned of by Remainers has.
As the Resolution Foundation has noted today, the economy is now 1.2 per cent smaller today than the Office for Budget Responsibility expected it to be before the 2016 referendum, amounting to around £800 a year for every UK household. Not since the Napoleonic Wars has Britain endured a comparable period of wage stagnation.
Should the UK soon enter recession, it is dangerously 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, 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 an average debt maturity of 14 years. But even so, with the national debt significantly higher than before the last crash (84 per cent of GDP compared to 35.2 per cent), Britain would be starting from a significantly weaker position than in 2008.
Average earnings are not expected to return to their pre-crash peak until 2025 (workers are still £13 a week worse off than in 2007). 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. As HSBC’s senior economist Stephen King likes to remark, the risk is that “in the event we hit an iceberg, there aren’t enough lifeboats to go around”.
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 Conservatives, who have already abandoned their past commitment to achieving a budget surplus, would be forced to become Keynesian converts or accept a lengthy 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 recession could create.