It was Mark Radcliffe (I think) who said of the Sex Pistols famous gig at Manchester’s Lesser Free Trade Hall, if everybody who says they were there really was there, they’d have had to hold it at Maine Road.
People like to say they were in the know and, more importantly, that they saw things changing before everyone else did. This applies as much to politics and economics as to music and fashion. Nowadays, it’s hard to find anyone who was in favour of invading Iraq, even though the opinion polls at the time said that the majority of people were. I wouldn’t be surprised if some of the people who were gung-ho for going in will now say that they marched against the war. Some might even have convinced themselves that they did.
And these days there’s no shortage of people who saw the recession coming. In newspapers, on blogs, in the pub and on Twitter, it’s not hard to find people who ‘knew it was going to happen all along’. After all, you only have to look at the signs. Bleedin’ obvious, wasn’t it?
These experts seem to have been remarkably quiet before 2009, though. From what I remember, not many people were talking about the prospect of a crash in the early 2000s. Most people assumed there would be a slowdown at some point but few predicted a severe recession. I recall a pub conversation with some City comp & ben chaps at the fag end of the 90s in which, after several pints, we agreed that ‘things couldn’t go on like this’. But things did. The economy kept growing, investment banking continued to boom and the sort of bonuses we thought were crazy in 1999 looked like beer money a few years later. The dot com crash caused a slowdown but the sky didn’t fall in. It’s a sign of the times that, what we called a mini recession back then, growth rates of 2.3 percent, we now call a recovery.
Earlier this week, I went to the launch of the OBR’s report Crisis and consolidation in the public finances. It’s a fascinating document and one which we’ll see quoted by all political parties in the run up to the election. I’ll write about some of the projections later but what’s new in this paper is the publication of figures from before the financial crisis.
Ten years ago, I couldn’t have written a blog like this because most of the information wasn’t in the public domain. It’s only really in the last five years or so that so much economic data has been freely accessible. The OBR’s report gives us some of the history of government spending before the financial crisis. I’m not getting into it today but at least now we can have a more informed discussion about whether, and by how much, it was ‘all Labour’s fault’.
What the report does show, though, is that even those who were supposed to have been in the know didn’t see the recession coming. Some forecasters thought the government was being over-optimistic about growth and tax receipts but this suggested the deficit was a bit on the high side, rather than heading for disaster. The tone of this quote from the OECD reflects the spirit of the time:
“In another four European Union countries (Italy, the United Kingdom, Greece and France) the projected deficit, while remaining below 3 per cent of GDP, is well beyond the safe budget margins which might reasonably be expected to ensure that the 3 per cent deficit limit would be respected in the face of a major cyclical downturn.” (OECD Economic Outlook, June 2007)
It’s saying that, if there’s a downturn, there’s a chance the UK’s deficit might go above 3 percent of GDP. As it turned out, two years later it was at 11 percent.
This chart shows what the OECD now thinks the UK’s structural deficit was in 2007 compared with what it said at the time.
So they now reckon it was about twice as bad as they told the government in 2007. Then again, look what they said about Greece.
Were our financial institutions any the wiser? Here’s what they told the Treasury in the run up to the 2008 budget.
A bit of a slow down, then. Growth rates a bit below those we have been used to recently. Perhaps another period similar to 2001 and 2002. Six months after the collapse of Northern Rock, even the most pessimistic didn’t predict anything close to what actually happened. As the OBR says:
Other official bodies were also relatively sanguine about the financial and economic outlook. The Bank of England said in its May 2008 Financial Stability Report:
“The most likely outcome for financial stability in the United Kingdom in the period ahead is that conditions improve gradually as measures are taken.”
And the International Monetary Fund said in its April 2008 World Economic Outlook:
“In the United Kingdom, growth is forecast to slow to 1.6 percent in 2008, as the lagged effects of the 2007 monetary tightening, a turning in the house price cycle, and the financial turbulence are projected to slow activity, despite monetary policy easing. Only a moderate recovery is foreseen for 2009.”
The IMF predicted a mild recession in the United States, with the rest of the G7 avoiding recession.
Another six months on, Alistair Darling made what looked like a throwaway remark in a Guardian Weekend interview.
The economic times we are facing “are arguably the worst they’ve been in 60 years,” he says bluntly. “And I think it’s going to be more profound and long-lasting than people thought.”
It was the late summer bank holiday. I remember reading it up at my parents’ house and saying, “Are you sure Alistair? What, worse than anything since the war? Come on…” By the time I got back to work, I’d forgotten about it.
I wasn’t the only one who was not convinced, though John Band’s “poo on a stick” piece dismissed the Chancellor’s comments with the most aplomb. Even among the government’s opponents, the reaction was curiously muted. Most of the reporting at the time seemed to focus on the reaction of Gordon Brown and whether the government was split, rather than on whether or not Alistair Darling was right.
A couple of weeks later I was in Canary Wharf when Lehman Brothers collapsed. That was when things started looking serious, though some people were still cracking jokes about it. This Telegraph timeline reminds us just how quickly things went bad afterwards. Just over half a year separates what now look like ridiculously optimistic growth forecasts from the catastrophe that followed. The fall was rapid and, for the most part, unforeseen.
Hindsight, though, is a wonderful thing. Very few people saw the recession coming and, even those who did, had no idea it would be so severe. Even a few months before the world’s economies tanked, experts were still talking about a slowdown and maybe the odd quarter of zero growth. The OBR’s report reminds us of the prevailing mood before the crash and that the disagreements were, on the whole, about the degree of slowdown, rather than whether or not there would be a recession.
What we got instead was a series of events that blew holes in all the major economies and from which we have still not yet recovered. The world changed in 2008, it’s just that very few of us realised it at the time.