Whisper it quietly, but the “R” word is being muttered once again in hushed
and fearful tones across the UK. On Google and other internet search
engines, scans for the word “recession” by fretting Britons have surged up
the list of topics of the moment.
But are the scare stories merely that? We can take a good deal of comfort this
Christmas from the knowledge that full-blown recessions happen rarely.
Technically, the minimum conditions for a recession to be declared are that
the economy has shrunk for at least two quarters in a row. For now,
reassuringly, Britain remains a long way from any such fate. GDP is set to
grow by slightly more than 3 per cent this year on most estimates – faster
than the long-term average (or trend) rate of 2.75 per cent.
Still, most economists agree that Britain faces a sharp slowdown next year.
The average forecast is for lacklustre growth of only 2 per cent. It is
certain that next year will be the most testing one for the economy since
the global slowdown at the turn of the decade, and probably since the most
recent recession, at the start of the Nineties.
As a landmark study by the late Christopher Dow identified, past episodes of
recession could be traced to a combination of a few, key triggers: tighter
economic policy through elevated interest rates, higher taxes or lower
government spending; blows to Britain from economic problems abroad;
collapses in consumer and business confidence; and a severe worsening in the
financial position of either companies or households, or both.
All of these factors can be seen in Britain – even if not to a degree that
would make recession a certainty. The shocks to the economy from abroad are
ominous. The US economy faces a sharp downturn after the slump in its
housing market, the toll from which is being aggravated by the credit
crunch.
There have been only three recessions in the postwar era: 1973 to 1975, 1979
to 1981 and in late 1989 or 1990 to 1992. The most recent one was painful
but its memory is fading.
What did it look like? In 1991, interest rates had more than doubled in two
years to 15 per cent, just as the Government withdrew Miras (mortgage
interest relief at source).
House prices plunged. Tens of thousands of homeowners were pushed into
negative equity as unemployment soared, forcing them to sell into a falling
market. Housebuilders were left with mountains of unsold stock and crippling
debts after years of overdevelopment. The housing market did not start to
recover until 1996.
Confidence has faltered in the present housing market, but housebuilders
believe that the market is set for a slowdown, similar to the winter of
2004-05, rather than an outright crash. Prices have levelled off and sales
volumes have fallen by up to 20 per cent since October. However, unlike
1991, interest rates, which stand at 5.5 per cent, are tipped to fall and
unemployment levels are low.
During the most recent recession, Gordon Brown, as Shadow Trade and Industry
Secretary, berated the Tory Government for job losses in manufacturing.
The sector took a hammering, with thousands of redundancies announced almost
every month. Industry then was less international and more exposed to
downturns in its traditional markets. More than 150,000 manufacturing jobs
were lost in 1991 as industry restructured. They included reductions at
British Coal, Rolls-Royce, BREL, the trainmaker, Leyland Daf, the
truckmaker, Jaguar, the carmaker, and Ferranti, the defence and electronics
business.
Now, employers’ groups believe that industry is in a better position to cope.
The EEF manufacturers’ organisation is predicting slower growth, not a
downturn. It says that manufacturing companies are leaner and smarter.
Martin Temple, the director-general, says: “There is a general perception
that industry is in much better shape not only since the early 1990s but
since the currency difficulties of 1998-99.”
In the retail sector, Kevin Hawkins, the director of the British Retail
Consortium, remembers seeing discount posters filling shop windows in the
early 1990s. He says: “In some sectors you would regularly see ‘40 per cent
off everything’. It was horrendous.” He notes that although the climate is
harsh for retailers, it is not yet on the scale of that period. The number
of people entering shops was as much as 5.9 per cent down on last year at
the end of this week, according to Footfall, the retail analyst. Nick
Gladding, of Verdict, the retail analyst, says: “2008 will be a really tough
year for retail, with the housing market in the doldrums. But it was very
different back then, with sales volume falling and retail inflation was
running at 6.6 per cent.”
The leisure sector has proved a good barometer of economic conditions.
In the early 1990s, the combination of the Gulf War, a recession and
spiralling interest rates proved to be a deadly cocktail for the British
hotel industry, tipping several high-profile operators over the edge.
Companies including Resort Hotels, Baron Hotels and Balmoral Hotels
International went bust, and Barclays, the bank, ended up being the biggest
hotel owner in the country. But the most notorious decline was that of
Queens Moat Houses, which was forced to write down the value of its hotel
assets by almost £1 billion and suffered an excruciatingly slow death over
the next 12 years.
Although hotels are still susceptible to economic and geopolitical vagaries,
as the aftermath of the terrorist attacks on the United States of September
11, 2001, showed, there are important differences which should ensure that
the industry is better insulated.
First, most of the hotel operators carry far less debt on their balance
sheets. The other big difference this time around is the reduced reliance on
the North American market. When the Gulf War of 1990-91 stifled
transatlantic travel, it was a disaster for hoteliers, wiping out a
significant proportion of hotel trade in London and other key tourist
destinations, such as the Cotswolds and Edinburgh.
The British advertising industry is showing few signs of a slowdown; in
fact, media-buying firms are predicting that a recovery may not be far away.
The picture was different 16 years ago. Advertising was one of the first
industries to suffer. When retail and finance groups began to have problems,
the quick and easy place to cut costs was marketing budgets.
This time, however, the opposite argument may apply. Sir Martin Sorrell, the
WPP chief executive, says: “P&G and Unilever all say that when
things get tough, you don’t decrease your advertising budget – you spend.”
Alongside hard numbers are softer signs that reveal our economic health. In
the early 1990s the telltale signs were straightforward enough: the abrupt
death of power dressing; shop windows plastered with gaudy discounts and a
plunge in the number of new cars on the road.
Economic Cassandras can choose from a bewildering menu of grim portents.
Famously, the hemline has been mooted as a weather vane for women’s
confidence. When times are good, apparently, women show more leg. As a
result, fashionistas are as divided on the economic outlook of the nation as
the Bank of England’s Monetary Policy Committee on a bad day: over the
summer there was a fad for maxidresses, but scant skating skirts are in
vogue now, The Times is told.
Estée Lauder, the cosmetics company, has nominated lipstick as a
sure-fire way of divining the direction of the economy. The theory is that
when women are cutting back on unnecessary expenditure, lipstick is the one
luxury that they continue to buy. The company asserts that sales soared
after 9/11 and during the recession of the early 1990s.
A final word must go to what is perhaps the most unreliable of indicators, the
stock market, with its ingrained volatility. As Paul Samuelson, the
Nobel prize-winning economist, joked, it has predicted nine out of the past
five recessions.
1991
January Alan Greenspan, the Fed chairman, calls the US recession a
“meaningful downturn”. Allied forces assemble in the Gulf. Oil prices reach
$30, then $40 a barrel
Febuary Government launched National Power and PowerGen. UK shares soar
as bank base rates are dropped by half a percentage point. Kuwait liberated
March Government says poll tax will make way for a new local tax.
Norman Lamont raises VAT to 17.5 per cent to finance £140 a head cut in poll
tax
April John Major says Britain recovering from economic problems. Base
rates came down to 12 per cent. Unemployment tops two million. Marks and
Spencer announced 850 redundancies
May British Telecom makes record profit of more than £3 billion, bad
weather boosts British Gas
June Car sales down 31 per cent on 1990. GDP figures show the economy
shrank by 0.8 per cent in the first quarter. Lloyd’s Names face heavy
losses. Barratt Developments suffers £105.9 million pretax loss as the
housing market continues to suffer.
July BCCI shut down after the discovery of $20 billion fraud. High
Street sales up 1.5 per cent but proves a false dawn. National Home Loans up
for sale
August UK inflation down to 5.5 per cent and Bank of England thinks
recession has bottomed out
September Britain's jobless total hits 2.4 million, highest for three
years. Robin Leigh-Pemberton, Govenor of the Bank of England, says he is
confident Britain is coming out of recession; interest rates down yo 10.5
per cent
October Asil Nadir, chairman of Polly Peck International, charged with
58 counts of theft totalling £130 million, faces £1 billion of writs from
Polly Peck administrators. A Lloyd's underwriter blamed for £260 million
losses to syndicate. UK inflation falls to 4.1 per cent
November The Woolwich rescues Town and Country building society. Robert
Maxwell dies at sea after going overboard from yacht
December Pan AM ceases operations, shares in MCC suspended on LSE
2007
January Consumer price index inflation rises sharply from 2.7 per cent
to 3 per cent
February HSBC warns on profits over US sub-prime exposure – the first
sign of the coming US mortgage crisis that will engulf markets
March The UK economy grows at an unexpectedly rapid 0.7 per cent in the
three months to March, according to the ONS
April Global sales of cosmetics, including make-up, reach a record high
of $269 billion (£133 billion) – see indicators panel
May Petrol prices reach record highs - and climb further
June Gordon Brown becomes Prime Minister, appointing Alistair Darling
as Chancellor
July Inflationary pressure forces the Bank of England to increase
interest rates to 5.75 per cent
August The Financial Services Authority contacts Northern Rock over
concerns about its funding model. Global markets plummet as the first signs
that companies would suffer serious losses from sub-prime were picked up by
the market.
September Northern Rock seeks emergency Bank of England funds.
Liquidity in interbank lending market begins to decrease October Stan
O’Neal, chief executive of Merrill Lynch, becomes the credit crunch’s
highest-profile casualty. He is joined five days later by Chuck Prince of
Citigroup.
November House prices show their steepest monthly decline in 12 years,
Nationwide reveals. The large American banks report multi-billion writedowns
on sub-prime related assets, sending jitters through global markets
December The West’s main central bank’s join forces to ease strains in
global credit markets and the Bank of England cuts interest rates by 0.25
per cent. Shares across pub and restaurant sector fall after profit warning
by Clapham House, owners of Gourmet Burger Kitchen. Richard Caring shows his
continuing faith in the luxury end of the market by increasing his stake in
the Carluccios restaurant chain
