Britain is facing the highest recession risk since 2007

Britain is facing the highest recession risk since 2007 and, whether or not one materialises, urgently needs a plan for mitigating the effects of the next downturn, a new Resolution Foundation report warns today (Sunday).

 

Failing to plan = Planning to fail is the first of a series of reports looking at the impact of recessions on households, particularly those on low-and-middle incomes, and how policy should respond to the next crisis.

 

The report notes that almost ten years on from the last downturn, the UK is facing a heightened recession risk due to both a slowdown in global economic growth and domestic uncertainty around Brexit.

 

The Foundation’s ‘recession risk’ indicator, which uses yields on government bonds to assess the threat from a recession, suggests that Britain’s recession risk has risen to its highest level since 2007. Britain’s recession risk has only been higher than its current level around the time that recessions or sharp slowdowns in growth have been observed.

 

Failing to plan notes that while no recessions are the same in terms of their causes and impact, they are uniformly bad for living standards. Looking over the past five recessions, it finds that the average shock to the economy has been equivalent to a £2,500 loss for each household in the UK, and that unemployment has, on average, increased by one million.

 

It warns too that it would be dangerous to assume that the next recession plays out like the last one, and that the big unemployment increases that characterised the 1980s and early 1990s recessions have been consigned to history.

 

Failing to plan notes that while even good policy cannot recession-proof the economy, it is crucial in limiting their impact and mitigating the effects on households. Analysis in the report suggests that without the large monetary and fiscal response to the last recession in 2008-09 – which included cutting interest rates from 5.75 per to 0.5 per cent, making £375bn of asset purchases through QE and reducing VAT from 17.5 to 15 per cent – the downturn would have been 12 per cent deeper, equivalent to £8,000 for every UK household.

 

However, the Foundation says that many of the tools used to fight the last downturn – such as big interest rate cuts and QE – are either no longer available, or likely to have less of an impact. This all means the UK needs a new plan to respond to the next recession and, whether or not a downturn starts in the near future, planning for it certainly should.

 

James Smith, Research Director at the Resolution Foundation, said:

“Ten years on from the end of the last downturn, the UK’s recession risk is at its highest level since 2007, with growth slowing at home and abroad, and widespread uncertainty around Brexit.

“While recessions differ in terms of the cause and effect, they are all uniformly bad for living standards. The average economic hit from the last five downturns has been equivalent to £2,500 for every household in Britain, and a million people losing their jobs.

“Policy makers 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 – from big interest rate cuts to £375bn of QE – are either spent or severely blunted.

“So whether or not a downturn starts in the near future, planning for it certainly should.”

Notes to Editors

  • The Resolution Foundation is setting up a new Macroeconomic Policy Unit (MPU) with the objective of improving the living standards of those in Britain on low to middle incomes by contributing to a broader, better-informed macroeconomic policy debate. The MPU will formally launch in the Autumn, but ahead of that will publish a series of papers designed to deepen understanding of the case for strengthening the macroeconomic policy framework.
  • For more information contact Rob Holdsworth on 020 3372 2959 or 07921 236 972.