Brace yourselves for a miserable recovery
First published in the Telegraph on 9 July 2009
It’s a game of far more than two halves: more tactical than cricket, more stomach-churning than boxing and more complex than bridge. Throughout a magnificent summer of sport, one competition has lasted longer than any other, and generated the most heated debate. Its goal? To guess when the recession will end.
Every week, it seems, has brought new economic indicators, good or bad. Indeed, the whole thing has recently descended into farce: first, economists were tripping over themselves to declare that we were heading for a “V-shaped” recovery, in which we soared out of the downturn at speed. Then they realised that the economy had contracted in the first three months of the year at the fastest rate since, most probably, the 1930s (the quarterly figures don’t go back that far), and started talking about “double dips”.
In fact, from a technical point of view, we are close to the end of the recession, in that economic growth is probably stagnating rather than shrinking. But this misses the fundamental issue: this recession was unlike any we’ve experienced since the Second World War. All the old yardsticks – those that measure economic expansion or contraction, for instance – are of limited use.
What we must fear this time is not the recession, but what follows. In 1931, in a lecture in Chicago, John Maynard Keynes spelt out the lesson we need to remember. The spring of that year had, much like this summer, been dominated by the search for green shoots. Markets had bounced back after the Wall Street Crash; industrial production had started to level out; confidence was returning. But, the great economist warned, “it is a possibility that the duration of the slump may be much more prolonged than most people are expecting and that much will be changed, both in our ideas and in our methods, before we emerge. Not, of course, the duration of the acute phase of the slump, but that of the long, dragging conditions of semi-slump, or at least sub-normal prosperity, which may be expected to succeed the acute phase.”
In other words, it is not the recession itself that will change the way we view our economy, but what follows it. It might feel like an eternity since the banking system collapsed, but as we impatient humans frequently forget, economics is a slow-motion affair. Having undergone a life-saving emergency operation, we are (in structural terms) still barely out of the emergency room, and still under the heavy anaesthetic of lower interest rates and fiscal stimulus.
This, perhaps, explains the strange feeling that many people have, which is that it doesn’t really feel like a recession at all. Most of us still have our jobs; even those whose companies are under threat of collapse are able to stave off unemployment by cutting back their hours and taking breaks from work. Consumer consumption has hardly come to a standstill: many restaurants are still doing good business; mocha frappucinos are being downed; life goes on.
Yet recessions are, by their very nature, events that affect only a minority of the population. Throughout the next few years, most of us will keep our jobs and be broadly unaffected by the ordeal. But there will be no return to the boom years: the recovery will instead take the form of a long convalescence, one that has barely even begun.
Neither is the gloom about to lift any time soon. At some point in the not-too-distant future, the anaesthetic will have to be cut off – interest rates must rise, the Government must start cutting its deficit and either reducing spending or raising taxes. Indeed, the International Monetary Fund spelled it out yesterday: while every other major country has budgeted to spend at least something on measures to lighten the downturn next year, Britain’s parlous position means we will not be able to put a bean towards another stimulus.
Meanwhile, unemployment is already on the rise: the number of people in work has fallen by 400,000 in the past year – the biggest drop since comparable records began in 1971. Many of the jobless are City workers with a bit of money to support them, or university graduates unable to find work (the case for one in five young men between 18 and 24). Redundancy hurts, as does failing to get an internship after college; but neither is as bruising as facing years of repeatedly trying and failing to find a job.
In terms of house prices, the worst of the price falls are over, but the prospect of buying has become no easier for the majority, because borrowing money is so difficult. The Bank of England’s interest rates are at near zero, yet banks are offering three-year fixed-rate mortgages at more than 6 per cent. And although the banks are making profits again, and financiers may award themselves even bigger bonuses, it is likely to be just as ephemeral, especially when the Government’s grand pledges to clamp down on City excess actually become law. Even if yesterday’s White Paper doesn’t do for the bankers, there will still be intense recrimination from the masses of the unemployed in the months and years to come.
In other words, we might well be coming out of recession. But for almost every section of society, the recovery will feel anything but.