History, it seems, does repeat itself. The Great War, an influenza pandemic and a financial crash which started in the Florida housing market all occurred over a 15-year period from 1914 through 1929. In 2008 we experienced a financial market crash that started in the Florida housing market, followed by Covid-19 in 2020 and then war on the European continent, 14 years later.
Despite the historical precedent from nearly a century earlier concerning what can happen following a housing crash, policymakers around the world missed the Great Recession in 2008. Mervyn King, then governor of the Bank of England, was asked a few days before the failure of Lehman Brothers in September 2008 what he thought was going to happen to unemployment. He replied: “I do not think we really know what will happen to unemployment. At least, the Almighty has not vouchsafed to me the path of unemployment data over the next year.” The unemployment rate would of course rocket upwards, and the subsequent austerity was a giant mistake, hurting ordinary people and producing years of slow growth.
We now know that the UK had entered recession five months before King’s remarks, in April 2008, but he had failed to spot it. He even claimed the UK economy had decoupled from the United States so what happened over there was irrelevant to the UK. This clearly wasn’t the case: when the giant US economy sneezes, the world catches a cold. Spotting a recession early—especially in the US—can help prevent policymakers making things worse, as they did after 2008.
All the signs are that another recession is on its way in 2022, yet policymakers have missed it again.
In the US, the National Bureau of Economic Research’s Business Cycle Dating Committee is responsible for dating recessions; since 1980 they have identified six. The committee only calls the start of the recession several months after it has actually begun; in the case of the 2008, it was a whole year later. This isn’t much use to policymakers who want to know where they are, and where they have been, in real time. In the UK there is no comparable group. A useful rule is two successive quarters of negative GDP growth, but this data is subject to revision. We didn’t know officially from the ONS that the UK entered recession in April 2008 until June 2009. Recession officially started in most EU countries that month also.
In our new work, labour economist Alex Bryson and I show it is possible to forecast recessions using the wisdom of crowds, based on what I have previously called “the economics of walking about.” People seem to know what is going on in the national economy and their local labour market much better than economic forecasters. We examined data on consumer expectations from both the Conference Board, an international research organisation, and the University of Michigan, and found that this data predicts every one of the last six US recessions called by the NBER several months before they happened. Our data also does not falsely predict recessions that didn’t occur. This data is now in recession territory in 2022, suggestive of an imminent US downturn.
This matters because what happens in the US impacts the rest of the world, and especially the UK. Over the last year, consumer expectations in the US fell by more than they did in 2007. We also have Conference Board data on the eight biggest US states, including California, Florida and Texas—and just as occurred in 2007, consumer expectations have collapsed and are predictive of recession in each state.
In Europe, the “fear of unemployment” series collected monthly by the European Commission in every EU country accurately predicts rises in the unemployment rate a year ahead, in the EU27 and also in the UK. A big concern is that this index took the second-highest jump ever in March 2022—at plus 13 in the EU27 and the Eurozone, it is an “increase in fear” second only to April 2020, and a larger rise than occurred in October 2008. In some countries the jump has been even larger. Sweden is plus 25, Portugal plus 22, Austria plus 21 and Ireland plus 17. Unemployment is set to rise in Europe and the European Central Bank rightly has no plans to raise interest rates in 2022. In contrast, the US Federal Reserve seems set on further rate hikes and quantitative tightening to slow the economy; another error.
In the UK, it was clear by the start of 2008, using data on “the economics of walking about,” that the UK was headed for recession. Sadly, as a result of Brexit, the fear of unemployment data stopped being collected in the UK in January 2021 and hasn’t been replaced. Oh dear.
However, we do have other scary data showing a major collapse in confidence in 2022 that is also suggestive of recession, and which started tumbling in May 2021. The chart above shows a substantial fall in YouGov’s index regarding British household views of what their finances will look like in 12 months’ time. The Institute of Directors’ Economic Confidence Index showed a “dramatic collapse” in March. New car sales in the UK have also plummeted. The Baltic Dry Index, which measures the price of dry shipping cargo like grain, is a good indicator of the level of global trade. It collapsed in May 2008 has fallen sharply since the start of March 2022.
If people think share prices will fall, then they will. When consumers expect an economy to slow, it does, as shown this week with very weak GDP growth. The continuing impact on supply chains of Covid lockdowns, and the war in Ukraine, seems to have pushed advanced economies over the edge. The OECD’s Composite Leading Indicators published this week are consistent with a recession hitting the UK, driven by weakening consumer confidence. It is just a question of when.
Central bankers haven’t helped by raising interest rates, and the scandal-engulfed chancellor has raised taxes just when he should be lowering them, slowing the economy further. This is even more unforgivable than missing the many echoes of a century ago, because we also have the experience of missed warning signs just 15 years ago. Unemployment hurts, and it is set to rise around the world. Wrong then, wrong now.
