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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
Rightmove: Asking prices edge closer to record peakAsking prices have been driven up by the top-end of the market, Rightmove has found. But how does the situation look in your area?
-
Coventry Building Society bids £780m for Co-operative Bank - what could it mean for customers?Coventry Building Society has put in an offer of £780 million to buy Co-operative Bank. When will the potential deal happen and what could it mean for customers?
-
UK wages grow at a record paceThe latest UK wages data will add pressure on the BoE to push interest rates even higher.
-
Trapped in a time of zombie governmentIt’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
-
America is in deep denial over debtThe downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
-
UK economy avoids stagnation with surprise growthGross domestic product increased by 0.2% in the second quarter and by 0.5% in June
-
Bank of England raises interest rates to 5.25%The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
-
UK wage growth hits a record highStubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
-
UK inflation remains at 8.7% ‒ what it means for your moneyInflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
-
VICE bankruptcy: how did it happen?Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
