The scale and speed of today’s rise in interest rates looks set to deliver precisely that. Past recessions have admittedly tended to be preceded by even fiercer monetary tightening.
For instance, the equivalent of today’s Bank Rate rose all the way from 5pc to 17pc between October 1977 and November 1979, and from 8pc to 15pc between June 1988 and October 1989.
What makes the speed and size of the present tightening different, and therefore potentially even more deadly, is that it comes after such a prolonged spell of near-zero interest rates.
Relatively expensive money is just not something we are used to, or have planned for.
It’s true that so far the Bank of England’s actions have been surprisingly slow to act on demand and jobs. This has been widely attributed to the cushioning effect of the savings surplus built up during the pandemic and the shift in the mortgage market to fixed rate deals.
More people also own their houses outright than in previous cycles. Higher mortgage costs are therefore on a slower burn. Together with the subsidence in energy prices and the deflation beginning to take hold in China, that’s led some to conclude that the old rules no longer apply.
Don’t be so sure. What’s clear is that rates won’t be coming down for some time.
Wage growth of 8.2pc, as reported last week, is not compatible with a 2pc inflation target. Eventually, there has to be a reckoning. Excuse the cliché, but it’s only when the tide goes out that you get to see who’s been swimming naked. I fear it’s a lot when it comes to the UK.
We more or less know where Britain’s productivity problem lies. Partly, it’s down to an oversized service sector, where productivity improvement is notoriously difficult to achieve.
A strongly growing public sector, with state spending swollen to more than 45pc of GDP, further raises the bar.
The supposedly transformative power of artificial intelligence in these stubbornly resistant parts of the economy has yet to be felt. Believe the promise if you will.
But the absence of recession has also stunted productivity gain across the economy as a whole. Among most of our leading companies, productivity isn’t a problem; it’s up there with the best in the world.
Unfortunately, there is a long tail of small and medium sized companies – the great hinterland of the economy, in other words – where this is not the case.
Many of these enterprises have for years struggled to keep their heads above water. The zero interest rate environment is about the only thing that’s kept them from going under.
Overall productivity won’t increase until the dead wood has been cut away. It’s a brutal, but necessary, Darwinian process. Sadly, it usually takes a bad recession to make it happen.
