The British economy looks in dire trouble right now. We have already seen two consecutive months of falling output, and there is no reason to expect that trend to be reversed any time soon. Inflation is running at 9%, pushing down real wages at the fastest rate in living memory. The Bank of England has already started raising interest rates, and will no doubt push them higher before the cycle is finished. The government is raising taxes, both on individuals and on companies, which will depress demand and investment.
Meanwhile the war in Ukraine is sending Europe into a downturn, hitting trade with what remains our most important market. Combine that with our economic woes and the UK looks certain to face a recession this year; the only real question is how deep and bad it will turn out to be.
In normal times, the chancellor and Bank of England would be doing all they could to avoid one. Recessions hurt; the country gets poorer, output falls, skills are lost, and otherwise viable businesses go to the wall. It’s all bad. That is why we usually do everything we can to avoid one, and, if it can’t be avoided, to make sure it is as short and painless as possible. And yet, just possibly, this year might be the exception to that rule. A recession might even do some good. Here’s why.
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Clear out the zombies
First, it is the only real way to bring inflation under control. Double-digit price rises have never been curbed without a recession. Prices rise when too much money is chasing too few goods, and that can only be bought back into balance if you have more goods or less money. It is difficult to magic more goods out of nowhere, so the only real fix is for everyone to have less money. That only happens with a recession, usually sparked when the central bank starts to put up interest rates aggressively. Without one, prices will carry on rocketing upwards forever.
Next, a recession will clear out all the zombie companies – the high street is still full of them and so are many other sectors. It may sound harsh, but the economy would be better off without them. They use up land, keep workers in dead-end jobs and tie up capital that would be better deployed elsewhere. None of them are capable of any real growth. With a round of bankruptcies the economy would be in better shape.
Third, a period of retrenchment might get people working properly again. A year of lockdown seems to have convinced people that just about any job can be done from home, or even from a beach on the Mediterranean. It simply isn’t true – the country is already grinding to a halt; the airports are chaotic, transport systems are snarled up, and the machinery of government hardly functions any more. If jobs are scarce for a year or two that will start to change. We will hear a lot less about home working, work-life balance and four-day weeks. It might be tough, but it would remind us all that work might be difficult and demanding, but it needs to get done.
Make the most of Brexit
Finally, it will force the government to finally take advantage of Brexit. Since leaving the European Union, the UK has done virtually nothing to deregulate, or to make businesses more competitive, even though we need to find some way to make up for losing easy access to our most important trading partner. With a recession, the government will have to think about how we can grow again. And it will have to start using the powers we have taken back in a positive way.
No one ever wants a recession but the truth is that they are a normal part of the business cycle. They used to come around at least once a decade, and although there was some pain, they cleared a lot of the dead wood and left the economy a little slimmer, but also a lot healthier. For decades governments and central banks have done everything possible to avoid any form of a downturn. Instead of fighting it, this time we should just let it happen – it might just do some good.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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