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
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