The UK’s economic recovery has been the slowest on record but it has been consistent. As the Conservatives are fond of boasting, the economy has grown every year since 2010. But a recession always comes eventually — and the UK has done more than most to precipitate one.
The 0.2 per cent contraction in GDP in quarter two (a fall of 0.4 per cent per capita) is being described as “surprising”, yet, in the context of a potential no-deal Brexit, it isn’t. Ironically, perhaps, the stockbuilding that took place in advance of the original Brexit deadline of 29 March 2019, and acted as an economic stimulant, helped create the conditions for negative growth.
Britain is now just one negative quarter away from its first official recession since 2009. And, though the financial sector is better regulated than in 2008, the UK is in most respects worse prepared than last time. 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).
To avoid a lengthy recession, the UK would need to deploy the traditional Keynesian weapons of higher public spending and tax cuts. Unlike some 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.
Boris Johnson, unsurprisingly, has already signalled that he intends to take advantage of this room for manoeuvre. In his opening weeks in No 10, Johnson has pledged to hire 20,000 more police officers, spend £1.8bn more on the NHS (though much of this is unspent funds) and pursue infrastructure projects including Northern Powerhouse Rail (or High Speed 3) and full-fibre broadband.
In common with Donald Trump, who has presided over the largest US budget deficit since 2012 (4.7 per cent of GDP), it would be unsurprising if Johnson gleefully allows government borrowing to rise by cutting taxes and increasing spending — one could call it reactionary Keynesianism. Fiscal conservatism has been subordinated to projects of national greatness: Brexit and “Make America Great Again”.
But though Britain has room for fiscal stimulus, the size of the national debt (83.1% of GDP, compared to 35.2% pre-crisis) means its room for manoeuvre is significantly more limited. For the public, the situation is still more parlous. 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.
The Treasury and other economists notoriously forecast that the UK would enter recession immediately after a Leave vote. It did not. Indeed, until today, Britain had not suffered a quarter of negative growth since October-December 2012 (the era of Osbornite austerity).
But now, even before it has left the EU (potentially with no agreement at all), the UK is faced with the prospect of a new recession. That economic crisis has been delayed does not mean that it would be any less painful.