It’s been six years since the UK economy was last in recession, but could another one be on the horizon? Severe recessions like the one in 2008 are a fairly rare occurrence – they happen about once every 70 to 80 years – but there have been seven in the 60 years since 1955, so there is a recession, on average, once every 10 years.
Of course sometimes there is a larger gap, like that from 1991 to 2008, and sometimes the same set of economic conditions can drag an economy into negative growth more than once.
The standard definition of a recession is (at least) two consecutive quarters in which the economy shrinks, so there have been a few quarters where the economy has shrunk in isolation.
What if there is another recession?
In a recent note, HSBC’s chief economist Stephen King described the world economy as an “ocean liner without lifeboats”.
What he means is, much of the monetary firepower of the major economies has been spent. Central bank balance sheets are high and interest rates are low - in the UK's case a record low. What is more, Mark Carney has said any rate rise may not come until 2016.
After previous recessions there has been a recovery period in which banks have been able to raise interest rates and, on the fiscal side, governments have been able to cut their debt back down to size.
If another recession hits, it could be a truly titanic struggle for policymakers. ... Remarkably enough, it’s six years since the last recession, suggesting the next one may not be too far away, yet there is a total absence of traditional policy ammunition…
...budget deficits are still uncomfortably large and debt levels uncomfortably high: while the US fiscal position has improved, it remains structurally weak.
That leaves the best option behind avoidance. There have been many steps taken to ensure the chance of a repeat is minimalised. Stress tests and greater liquidity for banks may, King says, achieve the stated aim of making sure the global financial crisis was a one-off.
But then again, not every crisis is the same.
The danger for policymakers is not so much that they haven’t worked hard to prevent the next crisis but, rather, they cannot easily know in advance what the next crisis might look like.
Admittedly, they can at least hope to make sure that the financial system itself will be more resilient in coming crises than it was in the last crisis, but that doesn’t alter the fact that all previous crises—whatever their cause—have been accompanied by sustained easing of monetary and fiscal policy.
The danger is that if there is a recession sooner rather than later, governments and central banks may find themselves under-gunned when it comes to dealing with them.
The Eurozone, for example, is just receiving its first doses of quantitative easing, six years after the UK left recession. Interest rates in the UK, EU and US are still at record lows. There seems to be scant room for manoeuvre.