So, just how bad will it be?
First published in the Telegraph on 11 February 2009
You say depression, I say recession. Depression, recession, depression, recession – what difference does it make? Given that everyone from the Prime Minister, Gordon Brown, and his former adviser Ed Balls to the head of the International Monetary Fund have admitted that the scale of the economic slump now justifies talk of the “d-word” it is time to tackle the question: what constitutes a depression as opposed to a common-or-garden recession and, more importantly, is that where we are headed?
The short answer is that a depression is an intense, longer-lasting recession, and yes, one is now looming – at least in this correspondent’s view. But before you start panicking, this does not mean that Britain is heading for the breadlines, widespread unemployment and starvation that scarred the US in the 1930s.
In any case, the difference between the “r” and “d” words is an academic one: neither term is particularly well-defined. A recession generally means at least two successive quarters of economic contraction – in other words at least six months in which the extra wealth generated by the economy is shrinking. Britain is now technically in recession, given that the economy started contracting in the third quarter of 2008.
The technical definition for a depression is far foggier. Some suggest that an economy must shrink by at least a tenth; others that it must contract for at least three consecutive years; another definition is that it is where families and businesses start having to sell off their assets simply to keep themselves afloat. Perhaps a more straightforward distinction is between something that we can recover from relatively easily, and something that pins us down for years.
My own definition of a depression is a deep, long recession that permanently alters the fabric of society and economic life, and leaves a lasting mark on popular culture. We are not there yet, but with every day that passes it looks likelier that this is our eventual destination. I doubt that Brown and Balls are attempting, as some suspect, to soften up the public ahead of a further torrent of bad news; more likely it is finally dawning on them that this is no ordinary recession.
This will not be like the early 1990s, or even the early 1980s; it will be a far more protracted and painful experience. It won’t merely alter the topics of conversation at dinner parties away from house prices and buy-to-let – that has already happened. It will mean that the very foundations of our economy will have to change. Many people will discover not only that the lifestyle to which they had become accustomed is unsustainable, but that the career they had been plugging away at simply no longer exists.
It will be profoundly depressing – all the more so when you consider that Britain has never really been through anything like this before. Quite where Ed Balls got the idea that this is the worst global recession for 100 years is unclear. But he was absolutely right to point out that this could be worse than the 1930s – in the UK at least.
The truth is that Britain didn’t have a Great Depression. Surprising as it may sound, while the 1930s may have been a period of intense misery for the United States and a number of other countries around the world, the UK’s experience was radically different. The first few years of the decade were pretty tough, but by the late 1930s life could hardly have been better for many people – particularly in the south of England. The age of mass consumption had arrived, the areas surrounding cities were blanketed with the glistening quilt of suburbia and the electronic and chemical industries flourished.
All the while, on the other side of the Atlantic, the US was enduring the worst collapse of a developed economy that there has ever been. The size of American economic output slumped by a third; unemployment climbed to a full quarter of the working population. The crisis was of a magnitude that was all-encompassing. Britain had nothing of the sort. Its banks were far more cautious, and as a result of that, and the devaluation of the pound as the UK left the Gold Standard, not a single British bank collapsed or faced a run in the 1930s.
If you want to look for a real period of economic misery, go back a further decade. If ever there was an era of economic misery in Britain it was during the 1920s, when post-war economic exhaustion and the effort to rejoin the Gold Standard left the country in a deflationary pit of unparalleled proportions. That was the last time the economy shrank by anything like the rate necessary to be classified as a depression. Our problem today is that the threat to the British economy from the credit crunch – that is, the inability and reluctance of banks to lend to people or companies – looks similar to what faced America in the early 1930s. In fact, our level of debt is even worse. If politicians make the same mistakes as they did back then, the outcome could quite possibly be another Great Depression.
But it is important to remember that, whereas Depression-era America had few social safety nets, such as unemployment insurance, the support now offered by the state to displaced or redundant workers – both in Britain and the US – is far more generous and comprehensive. It also seems as if finance ministers and central bankers are avoiding at least some of the same mistakes; they have cut interest rates fast and supported some banks whose failure would have been disastrous for the economy.
In the 1930s, so many American banks collapsed that there were thousands of towns that lost their only source of finance, and as a result local economies simply ceased to function. Things are bad, but not quite that bad.
Politicians are making fresh mistakes – for instance, the cack-handed treatment of Northern Rock in its final few months, or the decision to allow Lehman Brothers to collapse. But the controversial decisions by the Federal Reserve and the Bank of England to slash interest rates to historic lows should help ensure that although this will be a severe recession, or even a depression, it will not result in vast swaths of the economy simply shutting down.
Despite this, the fabric of the British economy must and will change. It had become overly-dependent on finance, on property-related industry and on borrowed money. In the future we will have to shift towards producing more.
Here, there is good news: all the signs are that this will soon start happening. Just as it did in the 1930s, the pound has dropped sharply. Back then, all sorts of factories popped up around the country, producing cars, electronics and machinery. Some were owned by the British, some by foreigners, and by the end of the decade the UK was pumping out more exports than ever before. The same could happen now, this time in the areas of computers and biotechnology. As irritating as the weak pound is for those of us desperate to take a week away in the Alps, it has endowed Britain with a terrific competitive advantage in the coming years.
The original ancient Greek from which the word “crisis” comes means an opportunity as well as a challenge; likewise the Chinese script for the word uses one brush stroke to symbolise danger and another to mean opportunity. So yes, we might have a period of depression, but it will not last forever. Britain is capable of emerging from it with a healthier and better-adjusted economy than it has had for decades.