The Coming Recession Will Be Worse Than 2008

Five consecutive quarters of economic contraction – that’s what the Bank of England predicted last week for the end of this year and the whole of 2023. 

If that doesn’t mean anything, try this: Britain is now headed for a recession that will last as long as the financial crisis of 2008. Only this time it won’t come after 63 quarters of growth – as it did when Lehman Brothers and Northern Rock collapsed – but after 14 years of stagnant wages and anaemic growth. While the cultural default before the late 2000s was to assume that things were generally getting better, today anyone younger than 31 has never worked in an economy with sustained average wage rises. Ahead of us is the third major recession in less than a generation, with Britain’s economy now expected to be no bigger in 2025 than it was in 2020. 

Taken by itself, five years of no net growth (per head the economy is actually set to shrink) is extraordinary. But this comes after the weakest 15-year growth period – from 2004 to 2019 – since 1934. We have already witnessed a 1930s-style drop in living standards, but instead of the post-war boom what now seems likely is that we will simply do it all over again.

In the last decade-and-a-half, the average British household has become comparatively poorer. Between 2007 and 2018, the Resolution Foundation concluded that average disposable incomes, adjusted for purchasing power, fell by 2% in the UK. Meanwhile, in France, they increased by 34% and in Germany by 27%. This is no longer a blip, Britain’s economy has been spluttering since the first iPhone was launched and Calvin Harris released I Created Disco. There is no law of nature which dictates this won’t continue for the next 15 years – or longer. A political elite that thinks otherwise is taking your consent for granted.

And while the media has focused on the extraordinary figure of 13% inflation, forecast by the Bank of England last week alongside its shocking GDP figures, that is on the more conservative consumer price index (CPI) measure – which doesn’t include things like the cost of mortgage repayments. Adopting the retail price index (RPI), the preferred measure during the 20th century, the picture is much worse with price rises set to reach almost 18% by the end of the year. While that falls short of the record 25% set in 1975, this time wages are failing to keep up. Indeed the official position of the Bank of England, and the government, is that people should get poorer. The Bank of England is predicting the largest hit to incomes since 1963, with a fall of 3.7% across 2022 and 2023. Such a calamity can be formulated in a single sentence: the typical worker who was earning £30,000 a year ago is projected to lose around £1,800 of spending power, come the end of 2023. 

Older voters might insist on telling us how bad the 1970s were. But between the first quarters of 1974 and 1976, following the oil shock, the share of household income spent on utility bills rose by 0.7%. By contrast, that figure is set to rise by 3.5% between the start of 2021 and 2023. In other words, the unfolding energy crisis is set to be around five times harsher for consumers than the supposed dark old days of yore. 

An inadequate response.

For Liz Truss, likely to be the next prime minister, the befuddling answer to all of this is to keep taxes low. Meanwhile, Labour wants to cut VAT on energy bills. One is irrelevant virtue-signalling to geriatric burghers, the other a barely visible dividing line – the definition of playing politics.

Yet at some point, even middle England will become restless as interest rates rise further. While its projections show inflation falling a year from now, the Bank of England anticipates CPI of 9.5% towards the end of 2023. Given the bank has said rates will consistently rise until its 2% inflation target is met, we can expect the cost of borrowing to continue to go up, with last week’s 0.5% increase (the single biggest uptick in 27 years) just the start.

This is the precise opposite of the policy lever that was pulled after 2008 when a deluge of cheap credit avoided a deeper recession. Raising the cost of credit, as energy and food prices spiral, is likely to entrench recession. What is more, renters won’t be immune as landlords hike rents even further (last year saw a record rise in London) to reflect the rising cost of borrowing. Creating a large number of people living in buy-to-let properties, with landlords highly leveraged on cheap credit, may have seemed a good idea during the Tony Blair and David Cameron years – the home-owning London pundits certainly think so – but it’s liable to crumble at some point this decade. 

Expect political defiance.

In an age of social media, it can often seem like politics is unfolding in real-time – that the process has morphed into viral tweets and a hyper-condensed media cycle, where the action plays out in the palm of your hand. But this isn’t true, particularly for events of the magnitude we are about to witness. The consequences of the 2008 recession took years to unravel, from the collapse of the Arcadia Group – exacerbated by online shopping, but catalysed by a crunch in consumer demand – to the advent of food banks and the cancellation of various regeneration projects. The “Preston Model” – a much-vaunted community wealth-building scheme that revived the northern city’s struggling economy – was, after all, a response to the collapse of a £700m plan to build a massive shopping mall in the city centre. The scheme began to die a slow death after the 2008 crisis, finally collapsing when John Lewis pulled out in 2011.

The political overhead of the last recession has been every bit as significant, from the emergence of the BNP in 2009, when they gained almost a million votes, to the SNP’s newfound hegemony in Scotland. Alongside that was the rise of Ukip, Jeremy Corbyn and Brexit.

This time, expect things to be even more intense – from the immediate economic shockwaves to forms of political defiance that follow. But one lesson that must be learned from the early 2010s is that ‘leaderless’ protest, while useful, has limits. Strong institutions, with a clear political programme, are critical. The ‘Enough is Enough’ campaign, fronted by trade unions, MPs and community organisations – and with five clear demands – is exemplary in this regard. For those in their twenties, who have never known anything other than economic sclerosis, that is a better bet for a brighter future than any amount of ‘grindset’.

The challenge for young people now is to help build a different kind of politics among a broad social coalition – all while ignoring the impotent, often performative hand-wringing of the propertied London commentariat. Despite Britain’s precipitous decline, the latter can still look forward to a comfortable retirement. For millennials and gen Z however – fast-becoming the backbone of the country’s labour market – it’s a very different story.