Blog
How best to avoid the ‘D-words’
26th August 2008
Much of the newsflow in recent months has been about the possible return of stagflation to western economies - with prices driven higher by a combination of rising energy and food prices allied to the risk of a wage-price spiral. But when asset price bubbles burst - as they are doing spectacularly in the US and UK property markets and elsewhere, the reduction in the value of wealth can expose big holes in personal balance sheets especially when millions of households have gorged themselves on borrowing.
Whilst the inflationary headwinds are yet to blow themselves out, as the real economy enters into a recession, the really tough and difficult year for the UK is likely to be 2009. What chance that - by this time next year - we are focusing on the risks of deflation and depression rather than tip-toeing out of a “recession lite”? Edmund Conway provides a commentary here on the dangers ahead. UK seems set for a recession and must hope to avoid a depression
“One of the first lessons is that recessions - particularly those that have their origins in the consumer sector - tend to last longer than people remember. According to Malcolm Barr of JP Morgan: “The early 1980s recession saw the level of GDP fall 6pc from peak to trough, while the early 1990s recession saw a 2.5pc fall. In both cases, once the gross domestic product stopped contracting, it took more than a year before growth recovered to a trend pace or above.”
In the same newspaper, Roger Bootle considers the possible cathartic effects of a recession in improving the efficient allocation of resources,
“The result is that it (the economy) actually needs a downturn to flush out the inefficient companies and thereby to release resources - people, machines, property and management - to permit the creation of new companies. Accordingly, far from fluctuations being necessarily bad, they have some characteristics that improve the allocation of resources and act to increase the sustainable growth rate of the economy.”
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.