It’s the dog days of 2009. Gordon Brown is prime minister, Alistair Darling is chancellor of the exchequer and Mervyn King is governor of the Bank of England.
Britain has been through a tough two years. As a country heavily dependent on financial services, it has been especially hard hit by the banking crash of 2008. The economy has suffered some severe recessions since the second world war but the slump of 2008-09 has been the worst of the lot.
Now, though, there are signs of things of picking up. Interest rates have been cut to 0.5%, the Bank of England is pumping money into the economy to compensate for a lack of lending by the commercial banks, the Treasury has allowed borrowing to rise to levels never seen before in peace time, and activist industrial policy is back in vogue. For the first time since the start of 2008, growth has turned positive.
That was how the UK economy looked at the start of the 2010s. Nobody was expecting miracles but the assumption was that the economy would at some point have a couple of years of rapid growth to compensate for the lost output in 2008-09 and then return to its pre-crisis trend rate of growth, which had been in the region of 2.5% a year. As the economy recovered, the Bank of England would gradually remove the colossal amount of monetary stimulus it had been providing by raising the cost of borrowing and selling the bonds it had bought from the private sector under its quantitative easing programme. Stronger growth would lead to higher tax revenues and lower welfare payments, allowing the Treasury to bring the budget deficit back down.
None of this happened. In fact, nothing much happened at all in the 2010s. The economy did not bounce back, there was never a return to the pre-crisis growth path, official interest rates today are 0.75%, the Bank has never unwound QE, the budget deficit has yet to be eliminated.
All of which makes the current decade extraordinary, in some ways the strangest for the economy of the entire post-war era. There have been plenty of difficult periods in the past, but they have tended to be temporary and explicable. The austerity of the 1940s – much more severe than that in the decade just ending – was the price that had to be paid for rebuilding an economy ravaged by war. The stagflation of the 1970s could be explained by the collapse of the Bretton Woods fixed exchange rate system, the spiralling cost of oil, and industries that could no longer compete internationally. The 1980s were book ended by two recessions that were made worse by policy blunders, but there was a period of strong non-inflationary growth in the middle of the decade.
The torpor of the 2010s is much harder to explain. Sure, it was a mistake for the coalition government that came to power in May 2010 to seek to reduce the budget deficit as quickly as it did. But it was a mistake for Harold Wilson not to devalue the pound immediately after winning the election of 1964; it was a mistake for Ted Heath to overstimulate an already inflation-prone economy in 1972-3; and it was a mistake for Margaret Thatcher to cripple industry with an over-valued pound in 1980-81. George Osborne’s overoptimistic view of the economy’s ability to cope with fiscal austerity in 2010 was no worse a blunder than Nigel Lawson’s decision to shadow the deutschmark in 1987-8, yet after its subsequent boom-bust the economy bounced back and went 16 years without a single quarter of negative growth.
Previous UK recessions conformed to a pattern. Rising inflationary pressure led to a tightening of policy. Interest rates were pushed up to punishing levels. Investment fell and unemployment rose as the economy slowed. Once inflation had come back down, interest rates were reduced, leading to a pick up in investment. Unemployment came down and the boost to productivity caused by higher investment resulted in higher real wages.
The 2010s have been different. For a start, the recession was not caused by a sharp rise in the cost of borrowing. The economy did respond to the monetary and fiscal stimulus provided by the Bank of England and the Treasury but on nothing like the scale that might have been expected. Investment has been poor, productivity growth virtually non-existent and wages adjusted for inflation are still below where they were when the financial crisis began.
On the plus side, the labour market has proved amazingly resilient. There were fears – entirely rational given the historical precedents – that a deep recession followed by a sluggish recovery would lead to unemployment hitting 4 million and then falling only slowly. Yet, the jobless rate is below 4% and back to levels last seen in the mid-1970s. Instead of the impact of recession being concentrated in pockets of unemployment – as it was in the mid-1970s, the early 1980s and the early 1990s – the pain has been spread around in the form of pay restraint for all.
Would there have been a different outcome in the 2016 EU referendum had the economy performed better in the first half of the 2010s? Almost certainly. Has Brexit highlighted deep structural problems – of industrial structure, underinvestment, poor skills, geographical imbalance – that need to be addressed? Again, yes. Will Brexit be the catalyst for the economic reset the country so obviously needs? That’s a lot more questionable. One thing that has not changed down the decades is the dogged hope that there is a quick fix for all the economy’s ills, if only it can be found. There isn’t one.