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The Financial Times
Theoretically a business focused paper, but honestly just a bit weirdly obsessed with Europe.
Steve | A-Team
Recession official, but this is just the beginning

It’s official: Britain’s troubled economy is back in recession. For most people this doesn’t mean a thing - the real numbers are their pay packets or their unemployment cheque. But economists watch quarterly GDP figures because they are a very good signal of what is to come. Two quarters of negative growth are very rarely the end of the bad news.

The prospects of a quick recovery are scarce. Inflation is still over 10% and still rising. Even if it begins to fall, that it is so high to begin with points to a long and painful adjustment for the economy. Unemployment will rise and wages will stagnate. The only question is how long that will go on.

What can the Government do? The Lawson and Thatcher view would probably be that this is a necessary adjustment and that the government needs to simply get out of the way and let it happen. Inflation will only come down if the exchange rate remains stable in the ERM, if interest rates remain high to restrain lending, and if government spending remains restrained; and inflation coming down is a precondition to prosperity. Further deregulation, privatisation, and tax reform funded by spending cuts would put the economy in a good position to recover.

Their view prevailed in 1981. They are widely considered to have been vindicated at the time, but the price was mass unemployment that persisted far longer than expected. Tory moderates will probably push a different approach now, arguing for a “soft landing”. There is no avoiding recession and higher unemployment, but they are likely to argue that inflation has peaked and that a more gradual fall in inflation is a price worth paying for a shallower recession and lower unemployment. Their policy prescription would mean lower interest rates, tax cuts or spending funded by small deficits, and a reconsideration of Britain’s current ERM exchange rate. Those policies would normally be anathema to Thatcherites, but increasingly many are worried about the political imperative of acting.

Even this approach would be relatively timid by historical standards. Labour is likely to argue for a more radical approach - prioritising employment with much more substantial public works programmes and a return to some degree of economic planning to direct investment where it would have most value. That may give the greatest short term benefits, but the long-term impacts are much more difficult to estimate - though are likely to be negative unless the government has got substantially better at picking winners than in the 1970s.

The final piece of the puzzle is Britain's place in Europe. Joining the ERM has not automatically led to economic stability, but it has put Britain's currency, and economy, towards a more stable path. There is no avoiding this adjustment in some form - the writing was on the wall long before the ERM, and has its roots in Lawson's pre-election giveaway in 1987. What comes after is what is most important. The single most pro-business and pro-recovery move the government could make would be to make the most of Britain's membership of the ERM and confirm that it is the path to future membership of a European Single Currency. That would allow business to start planning with confidence of a Britain at the heart of the single European market, and give long term direction right now to an economy that sorely needs it.
Steve | A-Team

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