The Long Recession of 2023-24

uk-real-gdp-march-24

It’s official the UK entered into recession last year with GDP falling over a period of six months. However, with only a 0.4% fall in GDP some argue the recession is relatively mild.

This is Not a Mild Recession

But, if we look at real output per capita, the UK economy has been declining for the past eight quarters. Two year of declining income per person.

gdp-per-capita-18-24

It will be the first parliament to experience falling incomes since the great depression.

change-disposable-income-by-parliament

And this chimes with the experience of the average workers who might have felt like they were in a recession before it was officially proclaimed. I want to explain why this recession is different to others, and also will try to look for some positive news amidst the gloom.

real-gdp-per-capita

It might sound like cherry-picking to focus on real GDP per capita, but I think in this case it is justified. If the population grows 10% and real GDP grows 9%, effective living standards are falling, and it is this that matters to individuals. No one really cares about the size of the economy per se, what matters is your own household income and whether the government can afford to improve public services. What is different about this recession is the long-drawn out nature of falling real incomes.

uk-average-disposable-income-1100

Average Mean household disposable incomes are lower than 2009, and with higher taxes set to come, the forecast is for this stagnation to continue for another year. This contrasts with the post-war period where incomes grow on average around 2%. If you use median incomes, this has done slightly better since 2009 but has still fallen in the past three years. And if we include housing costs, disposable income is even lower. When people talk about the UK economy turning a corner, it is not particularly visible for households who have seen a decade of near stagnant incomes.

uk-recessions

This is a difference between this recession and previous recessions. In 1991, we had a sharp fall in output, rise in unemployment, but when interest rates were cut, the economy quickly bounced back and caught up from the lost output. But, the UK still hasn’t really bounced back from the 2009 recession.  Productivity growth has fallen sharply and growth is so low, that it doesn’t take much to push the economy into recession. For many households, talk of a technical recession may leave them cold in that the average person doesn’t worry about GDP stats, but does worry about paying bills. A Bank of England survey found that banks fear the biggest rise in loan defaults since 2009 Credit crunch, and this is reflected in the fall in volume of retail sales as inflation has reduced consumer buying power.

ftb-mortgage-payments-jan-24

Households have been squeezed for three reasons. Higher interest rates have increased the burden for homeowners with the share of mortgage payments to income rising close to previous crash levels. Those who rent have not escaped, with rents rising 6% in the last year. The result is that the UK has one of the highest shares of housing cost to incomes in the OECD. In the UK we basically, we pay more for smaller space, with relative prices the highest in the OECD.

taxes-share-gdp-forecast-obr

Secondly due to low growth, the tax to GDP burden has risen to the highest level since the war, recent NI tax cuts don’t offset the recent increase in income tax thresholds.  Recent NI tax cuts seemed to create little enthusiasm.

uk-savings-ratio-07-24

Last quarter the household saving ratio rose above 10%, which indicates how households are pessimistic about the prospects for the economy. What may be happening is that households are anticipating lower living standards in the future and therefore are responding by increasing savings.

(there is also an element of higher pension contributions)

saving-pension

This pessimism is leading to lower consumer spending, which is traditionally used to prop up the UK economy.  We are seeing a big adjustment to the new higher interest rate environment and an era of falling real house prices.

uk-pmi-march-24

Now, I promised some good news, so recent survey suggests businesses are looking to expand production. A PMI of greater than 50 indicates expansion of the manufacturing sector as firm purchase more inputs. This is a tentative sign of recovery. However, this turning of the corner needs to be placed into context.

uk-industrial-output

Industrial production has been in a major decline since 2020. Not only have we fallen behind the post-war trend growth, but there has been a 5% fall in the past 5 years. This is a prolonged recession in the industrial sector.

uk-services-output

The economy has become more reliant on the service sector, which at least has seen some growth. One reason perhaps, is that whilst UK trade in goods to Europe has been hit by new trading arrangements, services have been relatively protected. However, the growth in services has primarily focused on the economy of London and the South East, and this raises another problem of UK economic performance, a growing regional divide. Take out London and the average income of the UK is even lower.

uk regional-gdp-per-capita

Overall business confidence is still negative, and it is not surprising given that levels of business bankruptcies have increased to levels last seen in the past two recessions. In particular high street business face very tough conditions as local city centres see decline in foot traffic, never fully recovering from the Covid change in consumer behaviour and cost of living crisis.

uk-unemployment-80-24

If there is one stat which justifies the claim we are having a mild recession, it would be unemployment. The Labour Force Survey shows UK unemployment is very low, and this makes a welcome contrast to the past two recessions, when unemployment soared towards 10%. However, whilst this is definitely a positive signal on the state of the economy, a less positive aspect is the fact that economic inactivity has risen due to ill health, and has led to a fall in labour market participation.

decline-healthy-life-expectancy

Healthy life expectancy has significantly fallen across the country in recent years. The rise in sickness, NHS waiting lists, and dissatisfaction with public services are contributing to a sense things are getting worse and this pessimism has been infectious in harming investment and entrepreneurship. Investment as a share of GDP has fallen in past two decades, making it hard to escape low growth.

Good news section

Regular readers make the point that my videos tend to be quite gloomy about the state of the UK economy and it is fair point, though in defence the statistics themselves make pretty gloomy reading. Nevertheless, if we tried to be very optimistic about the UK economy what could try to do?

cpih-core-inflation-feb-24

Well, firstly inflation has come down quite sharply and is forecast to keep falling throughout 2024.

dutch-natural-gas-futures

If we look at gas futures prices, we can expect continued falls in energy prices in the coming years. Russia turned off gas to Europe, but the transition to a post-Russian supply has been more seamless than perhaps even the most optimistic forecasts. Even oil prices have stayed remarkably consistent despite problems in the Middle East. It was rising gas prices in 2022, which caused such a devastating supply shock and cost of living crisis. This year, we could see the opposite a positive supply shock. However, don’t expect people to feel particularly better off. Lower inflation just means prices go up at a slower rate. It doesn’t undo the past 20% rise in price level.

But, the other benefit of falling inflation is that we are finally seeing positive real wage growth. This is crucial for changing the past years of stagnant wages. In a positive scenario, inflation falls to 2% and nominal wage growth continues to be higher. It would need a long time for rising real wages to really make a difference.

One other caveat to falling inflation is that because core inflation remains more sticky the Bank of England are holding off cutting interest rates. You could argue this is mistaken, but it is leading to the highest real interest rates for over a decade. Good for savers, bad for borrowers.

impact-minimum-wage-resolution

Another piece of good news is how the lowest-paid workers have actually seen some of the biggest increase in real wages in the past decade. As the Resolution Foundation rightly point out the National Living Wage is a rare example of a really successful economic policy. It increased the wages of the lowest paid, without causing the feared unemployment. Also, after favouring pensioners and high earners in the past decade, the last budget was remarkable in shifting the tax burden from low earners to high income earners and pensioners.

impact-budget-2024-resolution

However, whether that is good news may depend on your perspective. The final piece of good news is that after a decade of virtually zero growth, the UK should have the potential to catch up lost output.

italy-investment

For example, Italy and Greece have been the worst-performing economies of the last decade, but are now seeing an impressive bounce in growth. Italy was widely mocked for being the sick man of Europe, no growth in 20 years but Italian investment surged after they introduced a US-style subsidy on green investment.

External Sources

 

1 thought on “The Long Recession of 2023-24”

Leave a comment


Item added to cart.
0 items - £0.00