October 17, 2018

Why Brexit could trigger a recession in the UK

By Priya Kantaria

Is a recession coming to the UK?

Yes, according to University of Oxford professor Jonathon Michie and University College London professor Thomas Gift. Speaking to Verdict, they argue that the scenario we face now is worse than it was in 2008.

A recession occurs when reported growth collapses, officially when the growth domestic product (GDP) per capita falls in two consecutive quarters.

GDP per head in the UK from third quarter 2013 to first quarter 2018

GDP per head in UK

Credit: Statista

GDP in the UK has been rising steadily following the slump during the last recession in 2008. The GDP charts for other global players like the US show similar quarterly growth.

Property market-weather forecaster Propcast reports strong levels of buyer demand across England and Wales so that on average it’s a sellers’ market. It says although buyer demand levels have fallen 5% between October 2017 to October 2018, “we are still quite a way away from England and Wales being a buyers’ market which would be a strong signal of having entered recession”.

Who pulled the trigger?

Oxford professor Michie separates the “systemic” factors that make another recession inevitable and the “triggers” that bring it about at that specific time and place.

The 2008 global financial crisis is often blamed on the US subprime problems, where money was lent to people to buy houses when those people would not be able to repay those loans. Michie says this was only a trigger, saying, “If that problem had not been there, it does not mean there would have been no crisis. There would have. There would have been some other trigger. Because the fundamental systemic factors had made the whole system unstable, and ready to collapse regardless of what actually triggered it.”

He suggests the trigger this time will be seen as something more immediately visible, such as Brexit, or Trump’s trade war.

History of “greed is good”

Finding the underlying causes of recent recessions means looking back to the ideologies that shaped worldwide economies. Michie looks to the measures brought in by the Thatcher and Reagan regimes, those of privatisation, deregulation, turning cooperative associations into public companies and increasing financial institutions in size and influence. He describes the ethos then as “’greed is good’, ‘there is no such thing as society’ and ‘what was good about the Good Samaritan was that he had money’.”

And he believes another recession is inevitable because the measures built on these principles are still in place.

But surely we’re better prepared this time?

“No, we are no better prepared than last time,” says Michie.

Professor Thomas Gift agrees the UK is worse off now than in 2008. Governments respond to economic downturns through monetary policy or fiscal policy. He says, “Monetary policy: lower the interest rate, but the interest rate is about 0.75% in the UK so there’s not much downward movement available. If you think about what the interest rate looked like before the last recession it was 5% so there was more room for movement there.

“In terms of fiscal policy, certainly the UK is not in dire economic circumstances like some other western European economies, but at the same time debt is £1.5tn. Despite all the austerity, we’re still unsettled by very high debt.”

The focus is firmly on Brexit

He says the present situation with Brexit in the UK is key now. Saying, “The big cloud overhanging the UK right now is Brexit and all the uncertainty that surrounds the negotiation. Markets react adversely to uncertainty, so the less confidence that businesses and citizens have that a deal is going to get done and one that’s favourable to the UK on Brexit, the more likely we are to see a downturn.”

 

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