UK not ‘recession ready’, think tank warns

Interest rate cuts and quantitative easing would only provide quarter of support needed, report says

The UK is unprepared for a recession, a new report from the Resolution Foundation has warned.

Researchers at the think tank said the Bank of England would be unable to offer its usual level of support if a recession hit, because interest rates were too low.

In previous financial crises the bank has used interest rate cuts to boost the economy

“The average interest rate cut in such periods has been over five percentage points,” a Resolution Foundation spokesperson said.

The Bank of England’s current policy rate is 0.75 per cent, meaning any interest rate cut of more than one per cent would be unlikely.

Quantitative easing was also used during the 2007 financial crisis.

The measure delivered around two-thirds of support to the ailing economy by reducing longer term interest rates.

“Today even long-term rates are now very close to zero, with 10-year government borrowing costs now below half a per cent,” a foundation spokesperson said.

The low long-term rates throw quantitative easing’s usefulness during a recession into doubt.

Researchers at the think tank believe interest rates cuts and quantitative easing combined would only provide a quarter of the support needed to support the economy during a recession.

Their report notes other countries are reviewing tools available to central banks, should a financial crisis hit.

The UK has not followed. The foundation is now calling for a review of the tools available.

Researchers urged officials to examine the pros and cons of a higher inflation target.

The think tank’s report comes as the UK lurches closer to a recession.

Figures show that growth in the services industry almost stalled last month as business confidence plunged to its lowest level in more than three years, according to the closely watched IHS Markit/CIPS UK Purchasing Managers’ Index.

The services industry accounts for nearly 80 per cent of Britain’s economy.

The private sector as a whole contracted in August after manufacturing and construction suffered continued slumps, the survey found.

“As well as trying to deliver good times, we should be making sure we are able to respond effectively in bad times to minimise the pain of the next downturn,” said James Smith, the think tank’s director.

“But the UK today is not recession ready.

“Our plans for fighting the next downturn have not been sufficiently updated to recognise this reality.

“Now is the time to plan for the next recession – because the one thing we know for certain is that it will happen.

“The UK today faces the highest recession risk since the financial crisis, and lower income households are now more exposed to a downturn than they were back then.”