Recession is probable but it isn’t like the 1970s

Aug. 26, 2008 by John Cranage

For those of us not so far gone in drink or dementia as to be unable to remember the 1970s, evocations of that dreadful decade by some commentators now that the siren song of continuous non-inflationary expansion is being drowned out by the squawking of economic chickens coming home to roost are pretty horrible.

To recap for those who don’t remember it, it was the decade of the IMF bale-out, the three-day week, industrial anarchy, rampant inflation, retreating GDP and soaring inflation and national humiliation.

And it’s all supposed to be coming back to haunt us. Or is it?

Sorry if you’re surfacing this morning after an idyllic summer break and are gazing at this column over breakfast but the economic story is bad. Charles Bean of the Bank of England, the country’s most prominent economist, no less, says so.

The slowdown – for that, technically, is still the situation – will drag on for some time yet, he says.

The upheavals in the global financial markets are spreading to other sectors. Soaring food and fuel prices are crippling household budgets. Manufacturers are finding it harder to pass on rising input costs to their customers.

Unemployment is rising. Inflation is more than twice its targeted level.

And … well, fill in the rest yourself.

But just as the cheerleaders for Mervyn King’s NICE decade overdid the euphoria, the doom-mongers now seem to be over-egging the recession pudding.

Comparisons with the ’70s are flawed for a number of reasons.

To begin with, we’re a long way short of the structural double-digit inflation of those years and the power of trade unions to drive through death-dealing pay rises is greatly reduced (assuming of course that ministers do not cave in totally to the public sector workers).

With most pay rises pegged at around the three to four per cent level – painful as that might be to many of us – the cost-wage spiral has been broken.

Also, the dramatic reconfiguration of British industry over the past 20 years means that the slimmer, more responsive and nimbler companies operating today are much less reliant on their home economy and in much better shape to pursue new markets abroad.

Justin Urqhart Stewart of Seven Investment Management is among those light on the doom and gloom.

He says of the current scenario: “We are nowhere near the scale of the 1970s. We will not have that level of depression. It will be painful but not on the same scale as the 1970s.”

Such relative optimism has, however, to be offset against the fact that many of us are way over our heads in debt and that house repossessions are rising as delinquent loans stack up.

Just reporting that in the public prints, argue some, is hitting confidence and making talk of recession a self-fulfilling prophecy.

But before you reach for a gun to shoot the messenger with, listen to David Kuo of the financial website fool.co.uk. He doesn’t hold with the ostrich approach to economic news.

“Can you talk yourself into a recession?” he asks. “No, it will happen if you talk it up or down.”