Is the ‘boom and bust’ cy­cle now a thing of the past?

A decade of growth must mean an­other re­ces­sion is on its way. Or does it? Tim Wal­lace ex­am­ines the eco­nomic ev­i­dence

The Sunday Telegraph - Money & Business - - Front Page -

It was one of the most daring and mem­o­rable prom­ises ever made on the econ­omy. Bri­tain would see “an end to the dam­ag­ing cy­cle of boom and bust”, Gor­don Brown said. It was a favourite phrase and a theme he re­turned to over Labour’s years in of­fice. Brown reg­u­larly used it to bash the Tories, con­trast­ing his years of pros­per­ity with a his­tory of eco­nomic ups and downs, from the Law­son boom to the dot­com bub­ble.

It has only be­come more fa­mous since the fi­nan­cial cri­sis proved him wrong in dra­matic fash­ion. A decade on, no­body is tak­ing any growth for granted.

Econ­o­mists are get­ting twitchy. Strong growth across al­most the en­tire globe last year was treated as a cause for worry rather than cel­e­bra­tion.

“The next re­ces­sion” is no longer an un­usual topic of dis­cus­sion in the City. Af­ter Brown’s hubris it is seen as a mat­ter of when, not if, it will strike. A decade of growth must mean a new crunch is on its way.

Yet a few econ­o­mists are again daring to sug­gest that reg­u­lar boom and bust cy­cles may be a thing of the past. Jagjit Chadha, di­rec­tor of the Na­tional In­sti­tute of Eco­nomic and So­cial Re­search, be­lieves the idea of a re­ces­sion com­ing along ev­ery 10 years is a mis­take, though a com­mon one.

“There will be a re­ces­sion at some point in the fu­ture, but I don’t think you can talk about it in a de­ter­min­is­tic way,” he says. “Is it the case that the longer it has been since the last re­ces­sion, it is more likely there will be an­other re­ces­sion? The ba­sic re­search sug­gests not.”

The eco­nomic cy­cle is of­ten de­picted as a wave ris­ing to a peak, fall­ing to a trough and back again, in a pre­dictable pat­tern. “The ac­tual cy­cle isn’t like that at all,” says Chadha. “It is very hard to de­ter­mine.” Watch­ing for im­bal­ances in the econ­omy is more im­por­tant, he says. Iden­ti­fy­ing these and re­ces­sion trig­gers is cru­cial.

A clas­sic cause of re­ces­sion is a strong re­cov­ery which turns into a boom. The econ­omy over­heats and leads to in­fla­tion, forc­ing cen­tral banks to hike in­ter­est rates which in turn causes a crash.

The slow na­ture of the re­cov­ery from the fi­nan­cial cri­sis means those usual sus­pects are not in the frame, ac­cord­ing to Chadha.

“What mat­ters is how much growth have we ac­tu­ally had in the last 10 years in the US? It has been a very slow burn. That means we might be at full ca­pac­ity, but it has taken us a long time to get there. Re­ces­sions are typ­i­cally trig­gered once we are way above ca­pac­ity, not when we are still around or be­low ca­pac­ity,” he says.

On the other hand, the way im­bal­ances build up over time means there could be good rea­sons to con­sider the length of an ex­pan­sion when con­sid­er­ing the chance of a re­ces­sion, ac­cord­ing to econ­o­mist Russell Jones at Llewellyn Con­sult­ing.

“Business up­swings rarely die of nat­u­ral causes – it nor­mally takes some kind of shock to bring about a down­turn,” he says. “But the sta­tis­ti­cal prob­a­bil­ity of that shock com­ing along tends to in­crease over time. The business cy­cle is more ma­ture. The con­di­tions which nor­mally re­sult in a down­turn are in­creas­ingly com­ing to the fore.”

He notes that “the ac­cu­mu­la­tion of debts is some­thing that doesn’t hap­pen im­me­di­ately, it is pro­gres­sive”.

He points to in­ter­est rate hikes at the US Fed­eral Re­serve as ev­i­dence of pol­i­cy­mak­ers re­spond­ing, and ruc­tions in emerg­ing mar­kets such as Turkey as a sign this could be a dan­ger to growth. In­ter­est rates are still low by his­tor­i­cal stan­dards, be­cause cen­tral banks have not seen in­fla­tion roar­ing ahead. But Jones takes lit­tle com­fort from that. “It might take less of an in­crease in rates in this cy­cle than it has done in pre­vi­ous ones [to cause a down­turn] be­cause the un­der­ly­ing rate of growth across the globe is less than it was,” he says. Debts in emerg­ing mar­kets, the US’S trade and bud­get deficits, Brexit, flaws in the eu­ro­zone, Ja­pan’s bat­tle with low in­fla­tion and China’s debts are on his list of risks. Deutsche Bank’s an­a­lysts of­fer some op­ti­mism. The US econ­omy’s av­er­age ex­pan­sion be­fore the Six­ties lasted for 30 months. Since 1980 it has been 98 months. Jim Reid, a strate­gist at Deutsche Bank, says the shift has been caused by struc­tural changes in the global econ­omy as China opened up to the world. Pop­u­la­tion booms helped too. That trend has also been spot­ted by James Car­rick at Le­gal and Gen­eral In­vest­ment Man­age­ment. “This ex­pan­sion looks ex­traor­di­nar­ily long, but that is be­cause we had so many re­ces­sions in the Fifties, Six­ties and Seven­ties,” he says. Now it is harder to have a re­ces­sion as the econ­omy has shifted from man­u­fac­tur­ing to ser­vices. “When you over-pro­duce in man­u­fac­tur­ing, we build up in­ven­to­ries and have to cut back on pro­duc­tion,” he says, with this ef­fec­tively be­com­ing a re­ces­sion. “But when you have a ser­vice­based econ­omy it is harder to get as many re­ces­sions be­cause you can­not over­pro­duce ser­vices.” As a re­sult, the 10-year rule of thumb may not ap­ply. In­de­pen­dent cen­tral banks should also help keep growth on the straight and nar­row. Car­rick agrees study­ing key in­di­ca­tors of over­heat­ing is the best guide to re­ces­sions.

Only some are flash­ing now with un­em­ploy­ment very low but in­fla­tion not surg­ing.

The length of the re­cov­ery does not mean a re­ces­sion must be im­mi­nent. But it does not mean “boom and bust” is over ei­ther.

“Talking about ‘the end of boom and bust’ has the wrong con­no­ta­tions… The idea was to try to con­trol the econ­omy in such a way it could al­ways stay on its op­ti­mal ex­pan­sion path,” says Chadha. “But we have such lim­i­ta­tions in our knowl­edge that it is al­most im­pos­si­ble to fine­tune in that way.”

‘Business up­swings rarely die of nat­u­ral causes – it nor­mally takes some kind of shock to bring about a down­turn’

Ups and downs: Martha Lane Fox, a lead­ing fig­ure in the dot­com boom, and Gor­don Brown, whose ‘an end to t the dam­ag­ing cy­cle of boom and bust’ quote still haunts him

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