Back to reality: Should we be worried about an economic ‘hurricane’ approaching?

‘When America sneezes, the world catches a cold’ – a US recession would certainly send shivers across Europe, including the UK, writes Hamish McRae

Can the central banks tighten credit without causing a financial crash? (Getty/iStock)

It is back to work. After four days of jubilee celebrations, people in the UK will be coming back to reality with a bump. The party’s over. What next?

There are several economic stories that threaten to get worse before they get better. One is travel disruption. This is most evident at UK airports, where flights have been cancelled and baggage has piled up. This is not simply a UK problem, however, for flights are being cancelled across America and Europe. KLM cancelled all European flights out of Schiphol on Saturday, citing crowds at the airport. Dublin airport seems to have managed to get back to normal after chaos a week ago. Nevertheless, it does seem that the UK is suffering more seriously than many other countries.

Another is the string of negative stories coming out of the high-tech companies in the US. It is a drip, drip of cutbacks. Elon Musk said he has a “super bad feeling” about the economy and wants to cut back staff at Tesla by 10 per cent. Netflix and Meta (parent of Facebook) have brought in hiring freezes. Even Amazon is reportedly cutting back.

Headcount is one of the first things companies look at when fearing a chill wind is about to blow, and a freeze is an immediate decision any enterprise can make. If things improve then the freeze can be relaxed. So it is a good canary-in-the-mine signal of what might come.

These fears have been amplified by Jamie Dimon, head of JP Morgan Chase, warning of an economic “hurricane” approaching. A couple of weeks earlier, the former chief executive of Goldman Sachs, Lloyd Blankfein, similarly warned of a “very, very high risk” of recession, though he acknowledged that it was not “baked in”.

When two top members of America’s financial aristocracy give such dire warnings, the rest of us should sit up and take notice. There is the well-known adage “when America sneezes, the world catches a cold”, and a US recession would certainly send shivers across Europe, including the UK, for the obvious reason that the European economy is more exposed to disruption from the Russian invasion of Ukraine, and the consequences of that.

And then there is inflation everywhere, with the latest numbers from Europe last week, up 8.1 per cent, topping expectations, and the European Central Bank now expected to increase interest rates next month.

So there is a lot going on, and the problem is how to sort out the clear signals from the mass of background noise. My own feeling is that the best way to do so is to break things down into bite-sized chunks. Here are some chunks.

First, disruption. The problem is that if you scale back any industry and then have to pump it up again, you are going to encounter problems. Service industries are particularly vulnerable because they cannot stockpile their output. That will not go on forever, but it will continue through the summer and autumn. Realistically, I can’t see it ending until there is a ceasefire in Ukraine.

Second, labour shortages. This is a global issue and, in a way, a welcome one because it means both that working people can get jobs more easily than at any time for 40 years, and that employers will have to learn how to treat people better if they want them to stay. But as big companies in the US bring in hiring freezes, this shows that the shortages will start to ease. At the moment, this is a high tech thing but it may well broaden.

I am also intrigued by what is happening in the labour market. The evidence is tentative but it seems companies are learning how to attract people, particularly young people, by improving the ways in which they “onboard” them. It is an ugly expression for a necessary process. If you want good people to work for your enterprise, you have not only to create an attractive package. That is stage one. Stage two follows when you have made the hire. The message is that if you want to keep people you have to pay more attention to those first months, so that they feel valued and their skills are developed.

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Next, there is the overall macroeconomic outlook. There will be some sort of slow down and whether that becomes a technical recession – two successive quarters of negative growth – seems to me less important than the broader issue as to whether there will be decent growth for the next five years, not the next few months. I am actually quite optimistic that the UK will avoid recession, but acknowledge I may be wrong.

Then finally there is money. Can the central banks tighten credit without causing a financial crash? Again, I think there are reasons for optimism, partly because it is not in the self-interest of anyone to have a crash, but also because the banking system is robust enough to cope with tougher times.

That’s a long list of worries through the summer and autumn. But to put these into perspective, it is when bankers and business leaders are bursting with self-confidence that the rest of us should worry. Now they are scared, as they should be, the rest of us can perhaps relax a little. So back to work.