The world is totally unprepared for a recession
When Bank of England chief Andrew Bailey used the word “apocalyptic” to describe what could happen to food prices, officials in the Treasury trembled. Such words are not supposed to be bandied about Whitehall, not least by the man running the UK’s monetary policy, whose words have the power to move markets. Was it carelessness, or was he trying to issue a real warning? Did he misspeak, or did his cold calculations around Russia’s war on Ukraine and wheat and grain supplies really lead him to conclude that a hunger crisis is on the way?
In the case of Bailey, it’s hard to say. The Bank’s Governor has been on a public tour since this infamous appearance in front of the Treasury select committee, trying to blame everyone and everything for spiralling inflation apart from the Bank. So I take his words with a pinch of salt.
But Bailey is not the only figurehead warning of grim times ahead. This week the head of the World Bank, David Malpass, issued his own warning, daring to use another word that tends to make economic officials quake: recession.
Speaking at an event hosted by the US Chamber of Commerce Foundation, Malpass shared his rather depressing outlook for the near future.
“As we look at the global GDP,” he said, “it’s hard right now to see how we avoid a recession”, with skyrocketing energy prices alone triggering major cause for concern.
The World Bank, along with other major forecasters, has been downgrading its growth estimations for the global economy, which now only sit at 3.2 per cent for the year – an extremely disappointing result when you consider how many countries have only recently managed to shrug off burdensome Covid restrictions and should be experiencing major bouncebacks.
Malpass adds to a list of economists and institutions – from financial crash forecaster Michael Burry to Deutsche Bank – who are raising the possibility of national or global recessions in the near future. The problem is not just one factor, but a combination of economic upsets across the globe that may mix together into a wholly unappealing cocktail.
There are the obvious sticking points: Russia’s invasion of Ukraine has sent energy prices soaring while limiting wheat and grain supplies, as Putin’s military has deliberately blocked the ports in Odesa that are responsible for key food exports.
China’s zero-Covid strategy continues to backfire spectacularly, taking prominent cities (and millions of people) offline for weeks, further eroding already-weakened supply chains. Meanwhile, the global economy is still reeling from worldwide lockdowns and economic upheaval, totally unprepared for the additional havoc being caused.
But then there are the knock-on effects of the headline upsets. The energy crunch has hit the parts of Europe heavily reliant on Putin’s gas exports especially hard. But as Rishi Sunak, the Chancellor, told the House of Commons this week, the UK’s proximity and trade links still make us “acutely exposed to the European energy price shock”. And then there are the consequences being discovered in the Covid recovery process: the UK may boast extremely low unemployment, but on the flip side, the labour market is extremely tight after the pandemic. No doubt this is contributing to rising inflation. Over in the US, repeated trillion-dollar handouts have economists increasingly concerned the economy is now overheating. And when it does, they fear a recession will follow.
The technical definition of recession is perhaps not doing us much service. The Bank of England’s latest forecast for the UK economy, for example, doesn’t predict an outright recession: instead it shows multiple quarterly economic contractions over the next few years, but not (yet) two in a row.
But meeting the technical definition does not determine whether people feel fine financially or significantly poorer. If Britain’s economic outlook is anything like the Bank’s projections, we are facing years of extremely lacklustre growth. The pain of all that – the missed opportunities, the lack of prosperity – will be felt across the country whether the experience technically qualifies as a recession or not.
And in the worst-case scenario, the UK or global economy won’t stay teetering on the brink, but fall into a full-blown recession. As much as the Bank and the Government like to indicate that they have plenty of levers left to pull, in truth options are wearing thin.
Having taken interest rates back up to 1 per cent, the Bank could theoretically cut them again, but the effects would be superficial at best. The Government, meanwhile, is looking at record-high debt servicing payments and would find itself in a perilous position if it had to borrow more. This would inevitably lead to tough decisions around government spending and what has to go: not the kind of decisions any politician wants to make overnight.
This gets to the heart of future-proofing Britain’s economy for when tough times arrive, yet again. We can say that the Covid crisis created a once-in-a-generation economic crisis, which has justified constant use of the magic money tree (read: vast money printing and borrowing) to get through it, but in truth we’ve had three major economic upsets in the space of 13 years.
There’s no guarantee that we will fall into recession once more, coming out of the pandemic, but there’s certainly no guarantee we won’t either. And having failed to fix the roof while the sun was shining, future economic dips may struggle to be met with the handouts we’ve become used to these past few years, with yet another £15 billion support package thrown into the mix this week.
One might argue the real problem is that the sun has never shone brightly enough since the financial crash for the roof to be fixed.
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