The economic anchor digs in

There’s little doubt now that the UK economy on which we all depend has taken a real dive in the past three to four months.
Back in the early part of the year, shoppers were still out in force. Not caning the plastic Christmas-style, perhaps, but still steaming out of the Victoria Centre with some hefty purchases.
It now looks like this was the last dance at the consumers’ ball, and that some time around May we all finally woke up with a thumping great hangover.
Nearly every business and economic report I read now talks about falling demand and fading optimism. The news is consistently negative.
This may seem sudden, but isn’t. Major financial events take months, sometimes years to wash their way through the economy, and much of the ebbing demand felt last year related not to the credit crunch but to increases in interest rates that began in 2006.
The big slowdown we’re going through now is the credit squeeze that began last autumn finally feeding through to purses and wallets that have already been given a good going over by petrol stations and power companies.
The credit crunch has been like a ship’s anchor that had a long way to fall: we all knew the chain was going out, but until it hit the bottom we carried on regardless.
Thanks to those surging oil prices, the anchor gained speed on the way down. It’s now crashed into the ocean floor, and the question is whether it will hold us back a bit or yank us right off our feet.
That’s the difference between a downturn and a recession.
Downturns – where spending falls back and a few excesses get reined in – happen every few years. In the big scheme of things, they’re no big deal and we soon get back on track.
Recessions are something altogether different, and what makes our current situation interesting is that only a few of the people in charge of our economy have actually been through one.
This was one of the points made to me by Digby Jones, the former CBI leader who is now a Government trade minister, when he visited Nottingham last week.
Lord Jones (a title he hardly ever uses) says there is a massive difference between downturn and recession. In the last recession (when he was working in the Midlands) roofs were being ripped off factories left, right and centre as industries simply disappeared.
When consumers stopped buying goods, the factories that made them closed, the people that worked there got dumped on the dole queue and a vicious circle developed.
Now? As before, shops feel the pain when you don’t buy that fridge/ TV or washing machine. But UK factories don’t because these goods are almost certainly made abroad.
The last two recessions, in the 1980s and early 1990s, exposed a UK economy that had underlying weaknesses: industries which could no longer compete, businesses which were inefficient, workers who had neither relevant skills nor a heritage of moving to different industries or different places.
And now? Businesses tend to run more efficiently than they used to. Many of the basic skills people have can be applied to other jobs. And people are more used to changing jobs, careers, even the places they live.
This doesn’t mean we won’t have a recession, or that if we have one people won’t have tough times and thinks it’s awful.
But it is unlikely to be as earth-shattering as the last.
In an era where information travels far faster and more freely than it did in the 1980s, we will probably know early in the autumn whether the R-word is going to hit home
By the same token, a recession episode may progress much more quickly. There are already tentative signs of oil prices starting to fall back, and the election of a new US President later this year may see the all important American economy look forward again.
We’re in for a tough few months now as that anchor digs in. But the UK economy probably won’t need a lifeboat this time.