Britain is facing its highest recession risk since the financial crisis of 2007 in the wake of an economic slump and wave of uncertainty surrounding Brexit, according to a new report.
The study, from the Resolution Foundation, calls for urgent planning to mitigate the effects of the next economic downturn.
It estimates the average economic shock to be a £2,500 (Dh11,546) loss for each household in the UK, equivalent to a national GDP drop of about 4 per cent.
The report, called Failing to plan = Planning to fail, adopts a 'recession risk' indicator, which uses yields on government bonds to assess the threat from a recession. It found Britain's recession risk has only been higher than its current level around the time that recessions or sharp slowdowns in growth have been observed.
Failing to plan notes that while no recession is the same in terms of its causes and impact, they are uniformly bad for living standards. It found over the past five recessions that unemployment has, on average, increased by one million.
It warns, too, that it would be dangerous to assume that the next recession plays out like the last one or that the significant unemployment increases that characterised the 1980s and early 1990s recessions “have been consigned to history”.
Furthermore, the global economic outlook has been unclear over the past two years as trade tensions have risen and the Chinese economy has slowed. The US Federal Reserve has signalled that it may need to loosen monetary policy if the outlook continues to deteriorate.
Failing to plan says that while even good policy cannot recession-proof the economy, it is crucial in limiting their impact and mitigating the effects on households. Analysis in the report suggests that without the large monetary and fiscal response to the last recession in 2008-09 – which included cutting interest rates from 5.75 per to 0.5 per cent, making £375 billion of asset purchases through quantitative easing (QE) and reducing VAT from 17.5 to 15 per cent – the downturn would have been 12 per cent deeper, equivalent to £8,000 for every UK household.
James Smith, Research Director at the Resolution Foundation, said: “Policymakers can’t prevent recessions from happening, but they can limit their damage with the right policy response. The problem for the incoming government and the Bank of England however is that many of the tools used to fight the last downturn – from big interest rate cuts to £375bn of QE – are either spent or severely blunted.
“So whether or not a downturn starts in the near future, planning for it certainly should.”