OPINION - The next recession may have already begun

(James Manning/PA) (PA Archive)
(James Manning/PA) (PA Archive)

If the UK economy soon slips into recession, we will likely gesture vaguely at summer – such as it was – for when the contraction began. GDP shrank by 0.5 per cent in July, the sharpest decline since December, with services, production and construction all shrinking.

To a large extent, this is the medicine working. The Bank of England has raised interest rates 14 consecutive times, from a historical low of 0.1 per cent in December 2021 to 5.25 per cent today – all in the name of price stability and returning to the 2 per cent inflation target.

That is, of course, little comfort for borrowers stung by higher repayments or a Conservative Party facing the prospect of seeking a fifth successive term amid a recession.

Before we go further, a caveat and a moment of self-criticism. Two weeks ago, the Office for National Statistics produced some rather substantial revisions to its economic data. It now transpires that the economy bounced back from Covid-19 far stronger than first thought. The ONS added nearly 2 per cent to GDP, meaning that the economy has surpassed its pre-pandemic size, and the UK is no longer the laggard of the G7.

Similarly, the FT’s data wizard John Burn-Murdoch suggests that when it comes to mortality rates, the UK’s Covid performance was, again, roughly middle of the pack rather than one of the worst. This demonstrates the importance not only of sound data, but of not basing vast narratives around one set of figures. Something I will try to be more cognisant of in future.

But I don’t think I’m necessarily making the same mistake today. That is because, even if July’s 0.5 per cent figure is slightly off, it still chimes with other data points, such as the recent flash PMI figures which suggested a slowdown.

There’s a broader point as well. Deep recessions are bad because they leave economic scarring, particularly in the guise of long-term unemployment. To be clear, shallow ones aren’t great. But the difference between a technical recession and flatlining growth isn’t as great as we might pretend. And we’ve experienced a lot of the latter in recent years.

Whether precipitated by the austerity of the early 2010s, the political uncertainty wrought by the Scottish and EU referendums, or the economic shocks of Brexit, Covid and Russia’s full-scale invasion of Ukraine, the UK economy has been stuck in a low-growth loop for over a decade. Notwithstanding the recent upward revisions, we simply aren’t productive enough.

This isn’t a uniquely British disease. The UK, US, Europe, Japan and a whole host of high-income economies slowed down at roughly the same time. It is a global problem, albeit with British characteristics. So, what’s the solution?

Adam Posen, president of the Peterson Institute for International Economics, thinks that governments need to buy “really expensive lottery tickets”. That is, invest in things like infrastructure, universities and promising technologies. None of these guarantee the breakthrough that delivers the next round of 2.5 per cent annual GDP growth, but it increases the chances.

The question is, therefore, are we buying the best kinds of lottery tickets? Or any at all?

In the comment pages, Robert Fox warns that Vladimir Putin now has two dangerous bedfellows supplying arms for his war in Ukraine. Anne McElvoy surveys the economic damage and says the Tories are looking lost at sea. While Victoria Moss reveals the worst part of working in fashion – having to tell people you work in fashion.

And finally, things can only get Pretter? One café has taken aim at Pret with a new “disloyalty” programme designed to steal customers.

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