Richard Ramsey: Should we really want a recession?

It used to be that no one wanted to mention the word recession, and doing so was considered a self-fulfilling prophecy.

But going through the deepest recession on record from a Northern Ireland perspective during the pandemic has perhaps desensitized us. At the moment, recessionary talk is actually the norm. Around the world, talk of the Roaring 20s has been consigned to the dustbin. Like Covid, talk of the R word is spreading fast.

However, the recession should not be our biggest concern right now. And some actually argue that a recession is economically desirable and the only way to eliminate inflation. While people assume that a recession means a huge collapse in output and a rapid rise in unemployment, the reality is that every recession is different.

With all the talk of going back to the ’70s with inflation at a 40-year high, the public is perhaps assuming that a recession this year would be like those experienced in the ’70s and ’80s as well.

So it’s worth taking a look at what a recession really means.

Going into a recession simply means that the economy contracts for two consecutive quarters, so it’s a technical term used by economists. Two consecutive quarters of the economy falling 0.1 percent is a recession, while a quarter of the economy shrinking by 5 percent followed by one in which the economy grows by a small amount is not. The latter is clearly worse, but it is not a recession.

At present, we are seeing inflation going through the roof, the UK tax burden about to reach its highest level since the 1950s, and before Rishi Sunak’s £15bn in subsidies, it was had forecast that real household disposable income would fall to its highest level ever. fastest rate since records began in 1956. Petrol and diesel prices are currently pushing towards the £2 per liter mark. In this environment, a technical recession is neither here nor there for consumers and households.

If we have a technical recession this year, it won’t necessarily add to the pain felt by consumers and businesses. Sharp declines in consumer disposable income have already occurred and are expected to continue regardless of a technical downturn. And some sectors of the economy, for example, the hotel sector, have already had a sharp drop in production for two quarters.

A technical recession won’t really mean anything to them. Nor is it going to have a major impact, in the form of widespread job losses, in the labor market, which is currently very strong. The unemployment rate will increase a bit, but it is still expected to remain very low, regardless of whether or not a technical recession occurs.

Unemployment used to be expected to reach 10 per cent during a recession and it was those ‘One in Ten’ people that UB40 sang about in 1981 who lost their jobs who were hit hardest. Today, although unemployment will not increase, the cost of living crisis is affecting everyone, although those with the lowest incomes are the most affected.

Working in the public sector is generally considered to be the safest place to work during a downturn or recession, but this is not the case in 2022. Given the current inflationary environment, the public sector is expected to see the highest salary increases. small and the largest. cuts in real terms of the economy. As a result, we may even see a flight from the public sector to the private sector like we have never seen before.

All of these factors explain why some, including the American economist Larry Summers, argue that we actually need a recession to increase unemployment. In the 1980s, Paul Volker, chairman of the US Federal Reserve, engineered a recession to bring down inflation, resulting in a huge spike in unemployment to nearly 11 percent. These are the discussions that central banks are currently having about how fast and aggressively to raise interest rates to keep inflation low while inflicting as little damage as possible on the economy.

But a rise in unemployment would make central bankers’ jobs easier in terms of dealing with inflation by taking the heat off the economy and also easing skills shortages. Of course, it is politically unpalatable to advocate higher unemployment as a good thing. Summers is quoted as saying that the US needs unemployment to rise above 5 percent (from the current 3.6 percent) for five years to bring down inflation; this would mean the loss of 10 million jobs. Summers offers alternative unemployment rate scenarios to crush inflation: 7.5 percent for two years or 10 percent for one year.

Ending the war in Ukraine to increase food supplies, a drastic increase in oil supplies by Saudi Arabia, and the lifting of sanctions on oil producer Venezuela would be the least painful way to curb inflation. But neither of these things is in the gift of central banks. Instead, all they really have is the ability to raise interest rates to reduce demand without (hopefully) collapsing the economy. In fact, this is what has been happening all over the world in recent months.

From a Northern Ireland perspective, the unemployment rate here is currently just 2.6 per cent and skills shortages are the biggest concern for many employers. Inflation here is also arguably more severe than elsewhere. Advocating for higher unemployment here is just as politically unpalatable in Northern Ireland as it is anywhere else, but it’s probably something many employers would want. And economists might argue that while it’s unfortunate for people, it would be in the broader interests of the economy.

Therefore, avoiding recession is not the panacea that many would have you believe. The biggest challenge is to avoid stagflation and get out of the looming low growth/low productivity slump.

And there are things that are within our control to try to deal with this, including coming out of the current recession in Northern Ireland politics as we approach the start of the third consecutive quarter without an Executive.

The UK government must also outline how it will boost the growth of the UK economy in an environment where Brexit acts as a slow economic prick. There has been a recession in strategic thinking and an inflated bubble in rhetoric. A credible plan is needed.

Richard Ramsey is Chief Economist (Northern Ireland) at Ulster Bank

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