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Sunday, 21 February, 2010 
The recession officially, according to the usual way of measuring them, came to an end a few weeks ago when the ONS posted that the economy had grown by 0.1% in the last quarter of 2009 so this seemed to be a relevant time to post some comments on the experience. The facts are that this was the longest and deepest recession since before the war. GDP fell by some 5-6% over the last 18 months and Britain was the first in and last out of the major economies. It was triggered by the credit crunch when a number of banks got into difficulties over their lending. As banks could not collect what was due to them, they stopped lending to each other, and like a virus the credit crunch spread around the worldwide banking system.
Government stepped in to save the banks and try to restore some stability and start lending again. What started as a monetary phenomenon as cash flowing around the system froze up turned into a full blooded recession as businesses and individuals couldn’t get finance. Further monetary measures were taken with the reduction in interest rates to all time lows as various Governments tried to kick start lending and spending.
Some Governments, ours included, went further and seeing the fall in demand responded in the time honoured Keynesian fashion and attempted to boost demand with fiscal measures. The UK Government cut VAT by 2.5% and introduced various schemes such as the car scrappage scheme to boost spending. When it was apparent that lending was still not growing the UK Government started the process of Quantitative Easing (QE), or printing money, and in total some £200bn has been pumped into the system this way.
So what has all this action achieved?
Well, the UK Government will claim things would be much worse if they had not taken this action or if they had taken a different course of action. However given that, unemployment has continued to rise (though not as much as originally expected for reasons I will explain below), lending is still not happening, the economy only grew by an anaemic 0.1% and sales figures since Christmas suggest we may slip back into recession I am sceptical that of what has been achieved, and I think it is unproven that the measures have significantly changed the course of the recession.
The consequences of these actions will be with us for many years in the form of huge debts. The UK is in debt to the tune of some £1.5 Trillion and this year alone the UK will borrow £178bn or 12% of GDP. To put that in perspective Greece has a deficit of only 13%. It is no surprise that the markets see the UK as a risk and it is probably only the possibility of a change in Government that is keeping the markets from panicking. All of this debt incurs interest payments and from next year we will spend more on these than on education or defence for example.
The unprecedented monetary expansion carried out has also let the genie of inflation back into the system. Inflation has been rising for some months now and topped 3.5% last month. Monetarist economists will not be surprised by this given the expansion in the money supply that happened under QE. We don’t really know just what the full effect of this policy will be but it certainly has not boosted lending and the risk is that as more normal lending patterns return then inflation will take off.
Unemployment has risen but no where near the doomsday scenarios that were forecast at the beginning of the recession. However if you look closely at the latest figures there are some interesting things happening. The headline figure has not risen as fast as expected, yes, but this is largely due to an increase in part time working or a reduction in hours. There has been a huge rise in underemployment, the difference between the hours people want to work and what they can work. This actually shows just how flexible our economy is that it has reacted in this way; but is this consequence of Government action, or of the inherent flexibility of the market built up over many years before Labour? Meanwhile the rate of long term joblessness has increased and a record 8.1m people are on out of work benefits.
Also, another example of this has been the rise in exports with fall all in the value for the pound. I think this also shows just how fundamentally strong the UK economy is in that it is able to react to a more favourable exchange rate. Once again I would argue this has nothing to do with Government policy but is a consequence of the hard fought reforms of the previous Conservative Government.
So we are left with huge debts that need financing, inflation is back, unemployment is high, growth is sluggish and we have zombie banks still not lending with the potential bed debts now the responsibility of the taxpayer.
To tackle the debts you usually cut spending and/or raise taxes, to boost growth you usually cut taxes, keep interest rates and the exchange rate low, but to tackle inflation you need higher interest rates, lower spending and monetary growth (which will bring upward pressure on the exchange rate). This is the course to be navigated by our economy over the next few years.
The economic consequences of Mr Brown will be with us for many years to come.
It seems John Redwood is thinking along similar lines: http://www.johnredwoodsdiary.com/2010/02/21/this-government-has-not-seen-us-through-the-recession/
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