Could it be that we are experiencing a different kind of recession this time around, one in which the adjustment is felt more through declining real wages, rather than as has historically been the case, surging joblessness?
Admittedly, there hasn’t so far been a recession as such, using the technical definition of two successive quarters of economic contraction. But also true is that there’s been hardly any growth for more than a year now, so we are very definitely in recessionary waters.
That we have not already been sunk by them is largely down to the fact that while preaching fiscal austerity, the Government has in fact been practising fiscal expansionism, pushing the day of reckoning out into the future.
In any case, the labour market has remained extraordinarily tight, with very little sign of the distress that would normally be associated with an economy heading into a downturn.
Nor has there been much sign of difficulty in the banking system. On the corporate side, borrowers continue to enjoy the benefits of the additional liquidity that was built up during the pandemic. Similarly, fixed-rate mortgage deals have protected households from the full impact of soaring mortgage rates; around two thirds of mortgage holders have yet to see any effect at all.
More than a million of these contracts fall due for refinancing over the next year, when there is also much corporate refinancing to be done.
So it may be that the feed through from monetary tightening is on a longer fuse than normal. Like pulling a piece of elastic, the brick may suddenly rebound, hitting the economy violently in the solar plexus.
Britain’s amazingly resilient jobs market provides the main explanation of why inflation is proving stickier in the UK than elsewhere.
