The cake is shrinking. The UK is probably in recession, and, as the Bank of England predicted the other day, the misery will probably last until 2025, the longest such run of contraction in a century. As the new chancellor Jeremy Hunt has warned, the country now faces a “tough road ahead”. That’s putting it lightly.
It is a grim outlook, for living standards, for the public finances and public services – and for hopes that Brexit would unleash a higher trend rate of economic growth.
Britain is suffering from the exact same set of problems as the rest of the world: energy and food prices pushed up by the war in Ukraine and disruption to gas, oil, grain and vegetable oil supplies and thus good prices; continuing shortages of semiconductors, other supplies and shipping containers from post-pandemic China; and the after-effects of the coronavirus domestically (such as 400,000 people suffering from long covid and out of the labour force).
Brexit too, though, adds to the constraints on British growth; pushing labour and distribution costs higher, disrupting supply chains and erecting barriers to exports to the UK’s largest market. It is a brutal truth that, a decade on from the 2016 referendum, the UK will be lucky to be barely better off.
The good news is scant. The economy shrank by 0.6 per cent in September, probably pushed a bit lower by the prolonged period of national mourning for the Queen, but still a huge drop. Yet it is going to be like this for many years to come. Even after the economy emerges from recession in 2025 – likely after the next general election – it is still going to be feeble.
The economy is not – yet – “officially” in recession. That will be confirmed early next year, when the current quarter’s data is revealed. That’s because the general consensus definition of recession is two successive quarters of “negative growth”.
This definition was offered in an article by the distinguished economist Julius Shiskin in The New York Times in 1974: “A decline in the seasonally and calendar adjusted real gross domestic product (GDP) in at least two successive quarters”.
The timing was no accident, because the West was then going through its worst, erm, recession since the end of the Second World War, funnily enough triggered by a global oil crisis triggered by a war (this time the Yom Kippur war of 1973 in the Middle East.
The UK’s condition was made comparatively worse by its low productivity rates, large trade deficit, a prior reckless fiscal and monetary expansion, high inflation (around 10 per cent and accelerating) – plus strikes. At the time, many expected the UK’s entry into the European Economic Community to improve matters. Plus ça change.
As in the 1970s, so now, we have stagnation and inflation coexisting – the worst of policy nightmares – and Britain is the laggard. Hard times lay ahead, because the real problem – ironically correctly identified by Kwasi Kwarteng and Liz Truss – isn’t so much excessive spending power so much as shortages, especially of workers. Higher interest rates, higher taxes and public spending cuts won’t solve any of that.
The Bank of England doesn’t have any gas reserves to pump. HM Treasury doesn’t have wheat fields to harvest. They only have the weapons they have to rebalance demand and supply, and they’re frankly unsuitable.
That is another reason why the economy is going to get pummelled: a recession is necessary to increase unemployment and thus squeeze inflation out of wage demands. If we reopened the labour market to EU workers, or any other workers for that matter, it would boost growth and alleviate inflation. But that is politically impossible, post-Brexit.
The R-word, recession, tends to fixate people, but it oughtn’t. The difference between, say, an economy that contracts by 0.1 per cent, stays at zero growth, or expands by 0.1 per cent is not really worth fussing about. This recession may prove shallower than past slumps (say in the early 1930s) which were shorter but sharper. But that is hardly consolation.
Minimal growth or contraction will feel the same in reality, and anyway these numbers get revised up and down later on by the statisticians. In the mid 1970s, the poor performance was in reality continual, but punctuated by the odd quarter of better numbers, sometimes due to some windfall effect or artificial stimulus.
After a short boom in the early 1970s, the economy was sluggish until another sharp recession arrived in 1980. Things recovered well until they overheated again, and there was another recession in 1990-91.
The point now is that UK growth is sluggish and has been sluggish for a very long time – since the banking crash in 2008.
Before that, the economy had been barrelling along nicely, after inflation was finally (well, not quite finally) squeezed out of the system in the 1990-91 squeeze which ended with the ERM crisis. So it’s interesting to recall exactly why the economy was so robust in most of the Major and Blair years.
It was an era of steady non-inflationary growth it derived from the following: The establishment of the EU Single Market in 1992; immigration of workers from Eastern Europe after about 2004; independence for the Bank of England in 1997; the World Wide Web; globalisation and the re-entry of China and India to the world economy; fiscal rules and stability; the Thatcherite reforms of labour, product and financial markets working through. It all helped.
With the exception of the operational independence of the Bank of England (briefly threatened by Truss and Kwarteng), all of those factors have either been played out or reversed by Brexit. For a great trading nation that relies on its own wits and international trade for its livelihood, the wave of protectionism that has swept the globe, epitomised by Donald Trump’s “America First” slogan, has been an especial catastrophe.
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But then it was compounded by Brexit and the failure to open up new markets (and not just pork markets in Beijing). With sluggish growth but a taste for consumption, good public services and imported pleasures, the British have left themselves little money to invest in their future, and foreigners have proved reluctant to “believe” in “Global Britain”.
Without investment in infrastructure and education, the long-term outlook for the UK is, if anything, poorer than it is for the next few years. Without inward investment, new kit and new software there will be no AI revolution in the UK, nor electric car production nor much else beyond the Ciry of London and maybe the life-sciences to drive prosperity.
The sluggish growth punctuated by relapses into inflation and recession will continue indefinitely. We’ll muddle through, but no more. “Recession” is far too mild a term for the coming British economic disaster.