With Sunak in charge, how long before Britain can get back on a path to growth?

There will almost inevitably be a recession next year, and the medium-term fiscal statement will be sorry stuff, writes Hamish McRae

What is worth noting is the market response to the appointment (AP)

The markets gave a warm welcome to the arrival of Rishi Sunak as the UK’s new prime minister, but whether the electorate will do the same hangs on a thread. There’s not much point in crawling over the fiscal numbers now – how the £40bn black hole in the government’s finances will be filled, if that is indeed the number. We will learn more about all that next Monday with the fiscal statement, which will be sorry stuff.

What is worth noting is the market response to the appointment, with 10-year gilt yields now around 3.6 per cent, whereas last Friday they went over 4 per cent. True, back in August, the rate was below 2 per cent, but rates have risen everywhere. The UK can now borrow more cheaply than the US and Italy, though it has to pay more than Germany or France. That will take a little of the heat off the surge of borrowing costs for everyone, including anyone having to take out or roll over a mortgage.

But this modest improvement does not change the reality that rising interest rates worldwide, plus the energy problems in Europe, plus the chips shortage, plus everything else means that there will almost inevitably be a recession next year. That is what the new PM was referring to in his first speech when he said that the country faced a “profound economic crisis”.

We know that. What we don’t know is the profile of the downturn next year – how deep, how long? – and following on from that, the likely shape of the recovery. It might seem a bit premature even to dream of the recovery, but in political terms it matters a lot. If Rishi Sunak can carry on until autumn 2024, and it is for the political commentators to opine on that, his government may be able to make a credible pitch that they have got the country back on a growth path again. So what can we say?

One thing is that there does seem to be an economic cycle from which the world cannot escape. It would be nice if economists were clever enough to eliminate the cycle, but they are not. Indeed, it may even be that the measures they take to alleviate the worst of one downturn set up the problems that lead to the next one. Think of the ultra-low interest rates that followed the banking crash and soaring inflation now.

A second thing is that recessions seem to have a natural lifespan. The official definition is that there are two successive quarters of negative growth. In plain language: when the economy shrinks for six months or more. Typically they last longer, usually between nine and 18 months, though the great depression in the US lasted the whole of the 1930s. The most recent US recession, the one associated with the banking collapse of 2008, lasted 19 months, and that was the longest since the 1930s.

The UK experience is slightly different from the US, but the point stands that it would be unlikely for a recession to last more than a year. So if we are indeed heading into one now, it would be reasonable to expect a recovery in 2024.

That, however, tells us nothing about what recession will feel like. There are too many variables. If there is a ceasefire in Ukraine in the next few months, it is quite possible that energy prices will have already passed their peak. That would take some of the pressure off inflation. But the reverse applies, and this winter’s squeeze on gas supplies to Europe may be very seriously disruptive.

Most recessions see a sharp rise in unemployment as big job losses take their toll. But there is such strong demand for labour now that this may not be the case. If this is right, real wages will fall, as they are already doing, but most people will keep their jobs.

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Some countries will come through this in better shape than others. The US seems to be going first in, or at least that is what a survey of business economists suggests. But that may mean it comes first out. The UK’s service-based economy may be more resilient than Germany’s manufacturing-based one, but we have a lot of problems associated with the aftermath of Brexit, and the chaos of the past few weeks has undermined business confidence more generally. The choice of Rishi Sunak as PM will help, but don’t expect a sudden surge in investment.

If I had to choose one single indicator that would tell us how serious this downturn will be, I would take house prices. If they are stable, or maybe even rise a bit through the next few months, then that provides a cushion to consumer spending. That in turn supports the economy more generally. If there is a housing crash, as is happening in some countries, including Sweden, then it will be more of a struggle for the economy to pull out of recession.

Of course, in social terms it would be good news if homes become more affordable. Any country where young people cannot hope to buy their own home is in deep trouble. But in economic terms, a solid housing market through the next two years would help support activity, and in political terms might just help our new PM make a credible case for having turned the “profound economic crisis” into an OK recovery.