The British economy, Philip Hammond is fond of boasting, “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 since the Brexit vote it has been one of the worst-performing major economies.
But Hammond’s boast is disquieting for another reason: the UK is now due a recession (defined, in the technical sense, as two consecutive quarters of negative GDP growth). Britain has historically suffered one around every 10 years and Brexit has merely heightened the risk.
The warning signs are mounting: UK GDP was today forecast by IHS Markit to have grown by just 0.1 per cent in the fourth quarter of 2018, the services sector is at its weakest since the third quarter of 2016, and house price growth is at its lowest since February 2013.
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, 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 (83.9 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 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.