First published in the Telegraph on 1 August 2008
Contrary to the received wisdom, life does not grind to a halt in a recession. It didn’t in the early 1990s and it won’t this time around.
Yes, I know that house prices are falling at the fastest rate since the Great Depression; that consumers are squeezed by rising living costs and meagre wage growth; and that the economy will probably dip into a technical recession in the next year or so – the first one since the early 1990s. And I realise that the one constant in recent weeks has been that, come rain or shine, the economic forecast gets reliably worse with each passing day.
However, let’s get this into perspective. So the economy may shrink for a few quarters; so house prices will lose perhaps a quarter or a third of their value; so we may have a little less money to spend in the next couple of years. I know it won’t be without some human impact. Hundreds of thousands could lose their jobs, and most of them will not deserve it. Just as in the last recession, we will all be touched permanently by the slump, whether directly or through a friend or family member who loses their job or home.
But this is not an economic disaster. It is still not assured that we will face a full-blooded slump of early-1990s proportions, with a million people joining the dole queue. Even if we do, this is hardly comparable to the 1930s, when America’s economy shrank by a full quarter and Germany’s by perhaps more. It is nowhere near the economic devastation wrought by the Second World War or the 1970s oil shock.
Life does not end with falling house prices. Nor does it end with negative equity. For most people trapped in a home worth less than their mortgage, it involves staying put and not moving for a couple of years.
Part of the problem is that the adjectives used to describe the downturn tend all too often to be overly emotive. It is “miserable” or “gloomy” news when house prices fall or the Bank of England raises interest rates, whereas a rise in retail sales is regarded as a major “boost” to the economy.
In fact, while spending may help boost the size of the overall economy, there is scant evidence to suggest it actually makes people more content. Research has shown that, despite the prodigious speed of economic growth over the past decade or so, we are actually less happy. Perhaps a period of thrifty living might even be good for us – boosting our balance sheets and our morale.
Nor will a recession reverse the phenomenal economic advances of recent decades. We are in the middle of one of the most significant shifts in modern history. Mobile telephony and the internet have delivered a productivity miracle not witnessed since the industrial revolution.
Just as it was a generation or so between the invention of the steam engine and the sudden spurt in economic growth in the 19th century, it is only in recent years that we have started to harness the full benefits of the communications revolution.
This is not just relevant for British families – though we would do well to remember that, at the time of the last recession, the average British family had neither a mobile phone nor email. Millions of Africans have leapfrogged fixed-line communications and are using mobile phones not just to talk but as means of paying for goods. In the same way, cheap solar technology promises to provide clean power not just for British homes, but for those in the furthest reaches of the developing world who have never had electricity.
More important still is the advent of China and India as major players in the global economy, which has contributed to an era of unprecedented growth. Productivity over the past 50 years has been far greater than at the time of the industrial revolution, enriching those in the developed and developing world.
This economic epic has barely begun, even though our attention may be diverted for a while. The influx of cheap goods from China over the past few years has helped the economy grow rapidly without generating dangerous levels of inflation. This is not a one-off dividend that has now been spent. Prices may be a little higher in the future, but the great shift is still happening, and the good times will return again.
A recent report from Goldman Sachs showed that although Britain’s economy may be overtaken by China and India in the coming years, the amount of wealth shared by each citizen on our small island will climb even higher than in the United States. It calculates that Britain could become the richest nation on earth, in terms of economic wealth per capita.
In the meantime, a cause for consolation is that our economic guardians are far more sensible than those in the last recession. Interest rates are set by an independent committee of experts – not politicians. The head of America’s central bank, Ben Bernanke, seems to be a more sensible policymaker than his predecessor, whose actions were largely responsible for causing the global credit crunch.
The benefits of Thatcher’s economic reforms – tearing down barriers to commerce and liberalising labour markets – made Britain one of the most dynamic, flexible, attractive places to do business in the world. Even a decade of Labour’s regulatory and tax creep has not entirely eroded this.
And even for those who like to dwell on the immediate future, there are reasons to dare to be optimistic. House prices have fallen very fast in the past year, as shown by Nationwide’s figures yesterday. This may be because homeowners, remembering the last crash, are prepared for the falls. This suggests prices may bounce back relatively quickly.
The recession will be a painful bump in the road ahead – not a full-blown roadblock. Those who get excited by forecasts of imminent apocalypse would do much better to look at the collapse of the Doha round of trade talks. A massive leap in global trade is what we have largely to thank for our prosperity today. Now it turns out our leaders cannot manage, even after seven years, to come up with a plan to sustain this globalisation. Now that really is something to get worried about.