Is the media talking us into a deeper recession than we might otherwise suffer? Will 2009really be that bad when interest rates and prices will be falling? As a proxy for the intensity of what passes for a "national conversation" about the economy, you can count the number of times the word"recession" appears in the press.
A trawl through the Lexis Nexis electronic database of the national and regional press reveals an alarming increase in the incidence of theR-word, but on prompted by real,recession-inducing events, rather than preceding them. A year ago there were just over 1,000 counts of the R-word. That jumped in January, on the back of a rash of gloomy new year predictions and some sharp stock market falls. The R-count then stabilises, with something of a jump in July, possibly on the back of the crises at Fannie Mae and Freddie Mac, the world's largest mortgage companies.
The real break in the series comes in September and October. This is key. For mid-September saw thecollapse of Lehman Brothers, or rather the refusal/inability of the US authorities to save that particularinstitution. There were images ofbemused bankers carrying their worldly possessions in cardboard boxes; a wave of stock market crashes around the world and the partial nationalisation of some of our own major banks.
The recession word-count rose still higher in November as theChancellor and the Bank of England started to utter the R-word: the media chatter becomes deafening.In the last three days of November "recession" was mentioned more often than in the whole of November 2007. So far this month the count is about 8,800 – still climbing, thanks to the demise of Woolworths, butperhaps reaching a plateau.
What's the point? Simply that the US Treasury and the FederalReserve shouldn't have let Lehmans go. It was at that moment, you might say, that the R-word migrated from its usual sheltered habitat in thebusiness pages to the rest of the newspapers, and from the "quality" papers to their popular brethren, when recession entered our national consciousness, and delivered a fatal blow to consumer and to business confidence. It corroborates the notion that the world and the UKeconomy "fell off a cliff" during those weeks.
One day some brilliant economist will emulate JK Galbraith'sfamous book on the Great Crash of 1929 and chronicle these events with forensic skill; will he, or she, with hindsight, judge that the decision to let Lehmans go down was the one that transformed the credit crunch into a slump?
Still, for all the talk of recession, 2009 will be for some a wonderful year. Tax cuts, interest rates heading to zero, falling prices, sliding house values; all will work to boost some families' disposable income. Just think; RPI inflation will be down to about minus 4 per cent next year, taking into account lower housing costs. Taking the concept of "household cash flow", the economics team at UBS predicts a 19 per cent improvement next year (see chart).
To work out whether it is going to be prosperous for your household you can try answering these questions. First, do you work in the public sector or rely on the state for your livelihood? Right now this is the only part of the economy, apart from agriculture and insolvency practitioning, that is growing. Indeed the state sector – principally the National Health Service – added some 15,000 to its strength over the last year, taking a slight edge off the rise in unemployment. The traditional security of public sector employment can also be leveraged down at the bank or building society; if you want to get a bigger house now you can cash in on the slump in house prices. Who would you rather give a mortgage to; a teacher or a hedge fund manager?
Which brings us to our second query; your accommodation. If you are lucky enough to have a tracker mortgage linked to base rate you will enjoy a still bigger boost to your disposable income next year. A borrower with a £200,000 mortgage will receive a £166 reduction in their monthly interest repayments for every 1 per cent drop in the official cost of borrowing. If the Bank cuts rates to 0.5 per cent, that means an effective pay rise (grossed up for tax) of £3,000. Those on standard variable rates and other deals will also see the benefit, though more slowly; if you're one of the few first-time buyers with a sizeable cash deposit or are moving house with plenty of equity in your home, you might also find yourself able to take advantage of the housing slump.
Third, what kind of car do you drive? Cheaper petrol, and diesel, thanks to the plummeting oil price, is making motoring more affordable. The collapse in second-hand car prices and the pressure on new car sales means there are some bargains out there. Given that private car sales were down 45 per cent in November, and even more for larger vehicles, your Land Rover dealer will greet you like a long-lost friend.
Such is the nature of capitalism, though, that there will be many, many losers, too; they will be close to 100 per cent worse off in 2009. The pain of this recession, as with every previous downturn, will be unevenly, unfairly shared. While some will be enjoying a mini-boom in their living standards, others will see their incomes collapse as they lose their jobs. The very unfortunate will also see their wealth destroyed, as negative equity evolves into bankruptcy and homelessness.
The only conceivable way to try to make this economic adjustment more equitable is by – and here we have to stir a few memories – an incomes policy. Although these were usually justified, when governments tried to make them stick in the 1960s and 1970s, as a way of fighting inflation, they were really about keeping unemployment down, by surreptitiously reducing the real wage. If we all agreed to voluntarily restrict pay rises in a "Year for Britain" (to borrow another mid-Seventies phrase) we might just keep the rise in joblessness to a minimum. Unthinkable? Well, so was nationalising the banks.
And, as the year drags on, the biggest single threat to growth will be fear of unemployment. For if our household cashflow really does rise by 19 per cent (for some) what is to stop us fearfully saving this windfall? The UBS economists think a good many of us will do just that – and that the net increase in spending will actually be slightly negative.
The less frightened we are of losing our jobs, the more likely we are to spend. A short-term, voluntary incomes policy might help us through this very difficult time and keep redundancies down – and at a time when big pay rises aren't really needed, given that inflation will soon turn negative. Gordon Brown should invite Brendan Barber and Richard Lambert to Number 10 for talks: I'd order the beer and sandwiches for the TUC and the CBI right now.
Stephen King is away.Reuse content