The U.K. is facing the highest risk of recession since the financial crisis due to Brexit uncertainty and a global economic slowdown, a new study has warned.
The ominous assessment of the nation’s economic health, published by think tank the Resolution Foundation, suggested urgent plans are needed in order to mitigate the impact of the next downturn, with many of the Bank of England’s monetary policy cards already played.
The Resolution Foundation’s “recession risk” indicator, which uses government bond yields to assess the threat from a recession, projects that Britain’s recession risk has now reached its highest level since 2007.
Britain experiences technical recessions, in which output contracts for two consecutive quarters, roughly once a decade. However, the combination of global trade and domestic political pressures mean that the avoidance of mass job losses and socio-economic detriment which accompanied the last downturn may not be as attainable.
There is some evidence to suggest that the U.K. economy may already be contracting, as manufacturers in June had their worst month in more than six years and consumer borrowing increased at its slowest pace since 2014. The overall purchasing managers’ index (PMI) for June fell to 14.0, well below the average forecast in a Reuters poll, and its lowest since February 2013.
Last month, the Bank of England cut its forecast for economic growth in the second-quarter to zero.
The U.K. is set to leave the European Union on October 31, but is embroiled in a domestic leadership contest which is compounding uncertainty surrounding the country’s mode of egress.
Boris Johnson, the frontrunner to replace Prime Minister Theresa May, has vowed to leave the EU on Halloween with or without a deal in place, a move widely anticipated to be profoundly damaging for the British economy.
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Monetary policy cards played
The last five recessions have produced an economic hit equating to around a £2,500 loss per household in the U.K., and increased unemployment by one million, the report said. However, it expressed concerns that following the global financial crisis, the Bank of England has used many of the tools in its armoury aimed at curbing future recessions.
During the last recession of 2008, interest rates in the U.K. were gradually cut from 5.75% to 0.5%, quantitative easing (QE) amounted to £375 billion and VAT was cut to 15%. The Resolution Foundation report drew on various economic studies on the economic impact of these measures to determine that without that policy stimulus, the downturn for GDP might have been 12%, equating to £8,000 for every U.K. household.
“Ahead of the next – potentially impending – recession, it is clear that U.K. policy makers do not have quite the same room for maneuver as they did ahead of the GFC (global financial crisis),” James Smith, research director at Resolution Foundation wrote in the report.
With interest rates already at historically low levels and QE unlikely to have the same effect as in the past, Smith said policymakers in the U.K. need to have a plan in place, warning that if policy is not able to respond, “a recession can become a depression.”
“Policy rates around the world look very unlikely to rise much further in the coming years, implying little scope for central banks to actively support demand during the next recession,” Smith said.
“This is a problem.
Model-based evidence shows that, if monetary policy is unable to perform its stabilization role because of the effective lower bound on interest rates, then a recession may be much more damaging.............................................................................................
Model-based evidence shows that, if monetary policy is unable to perform its stabilization role because of the effective lower bound on interest rates, then a recession may be much more damaging.............................................................................................