UK at highest risk of recession since 2007, says think-tank

UK at highest risk of recession since 2007, says think-tank

The latest official data  suggests that growth in the second quarter will tumble from the first quarter rate of 0.5 per cent close to zero. A recession is defined as two negative quarters

The latest official data suggests that growth in the second quarter will tumble from the first quarter rate of 0.5 per cent close to zero. A recession is defined as two negative quarters

 

Britain is facing the highest risk of a damaging recession in 12 years and is ill-prepared to cope, the Resolution Foundation said on Sunday.

UK recessions occur on average every decade, reducing living standards by £2,500 (€2,790) per household in today’s prices and raising unemployment by 1 million, the think-tank said.

The downturn may not be preventable, the Foundation said, but ministers and officials have failed to draw up plans to respond to it.

Calling for an end to complacency about the economy, James Smith, research director at the Resolution Foundation: “The UK’s recession risk is at its highest level since 2007, with growth slowing at home and abroad, and widespread uncertainty around Brexit.

“Policymakers can’t prevent recessions from happening, but they can limit their damage with the right policy response. The problem for the incoming government and the Bank of England, however, is that many of the tools used to fight the last downturn are either spent or severely blunted.”

In recent weeks, the economic data has taken a turn for the worse in the UK and across much of the world. The PMI surveys of manufacturing, construction and services activity fell to levels where a majority of companies were saying output was falling.

The latest official data also suggests that growth in the second quarter will tumble from the first quarter rate of 0.5 per cent close to zero. Not much additional bad news would be needed to show a contraction on the quarter. A recession is defined as two negative quarters.

With sentiment deteriorating, the Foundation built a model to help predict recession risks. It uses financial market evidence from government bond yields at different maturities to assess participants’ subjective view of recession risks.

These have risen to almost 40 per cent in recent weeks from 21 per cent a year ago and have only been higher before recessions or sharp slowdowns in the past.

Examining previous recessions, it found that each was different, although many had their roots in global rather than domestic problems. All came with a significant hit to incomes or employment. The most recent recession after the global financial crisis of 2007-08 was the deepest since the second world war and the recovery has also been the slowest.

Partly as a result, policy has not returned to normal, with interest rates still extremely low at 0.75 per cent, £435 billion of outstanding quantitative easing and huge public deficits.

Quantiative easing was the Bank of England’s policy of printing large amounts of money and pumping it into the economy via the purchase of government debt in a bid to keep all interest rates low and allow the government to borrow cheaply.

The UK’s public debt burden is roughly at 80 per cent of national income, twice the pre-crisis rate.

With rates still close to zero, quantiative easing having lost much of its power and high levels of public debt, all options for fighting a recession were more difficult and required thought now, the Foundation said. It estimated that if no action had been taken in the last recession, Britain would still not have recovered to the level of output in 2008. – Copyright The Financial Times Limited 2019