MNI INTERVIEW: US, UK Recessions May Be Deeper Than GFC Slump

The U.S. and UK economies are already in a recession that may well prove even deeper than the sharp contraction linked to the 2008 financial crisis as consumer confidence collapses, former Bank of England Monetary Policy Committee member David Blanchflower told MNI.

Policymakers are too focused on inflation pressures that will likely subside within a few months and not enough on leading indicators like plunging lumber prices and shipping activity that show an economy already flirting with a significant slowdown, he said.

“My suspicion is this recession will be longer-lasting and deeper” than that seen in 2007-2009, said Blanchflower, now a professor at Dartmouth College, in an interview.

That applies to both the United States, where the economy shrank by a post-war record of 4.3% from peak to trough during the course of the global financial crisis, and the United Kingdom, which saw a 6% drop, he said.

LESS ROOM TO CUT

One reason things could be worse this time is policymakers are a lot more worried that high inflation will become embedded in consumer psychology, which will make it harder for them to pivot to an easier monetary policy stance. Moreover, there is less room for central bankers to cut rates and fiscal policy is unlikely to provide substantial support, Blanchflower said.

“The ability of the central bank to cut rates from 500 to zero then is not true today” said Blanchflower, also a former visiting scholar at the Boston Fed. “The unemployment rate in the U.S. got to 10%. I see no reason why it shouldn’t do so again."

Minneapolis Fed Research Director Mark Wright told MNI last week the Fed is cognizant of recession risks but he does not foresee one in the near-term. (See: MNI INTERVIEW: Fed Tightening Already Having Effect–Wright)

The U.S. economy shrank at a 1.5% annualized rate in the first quarter, but most economists dismissed the decline as a blip. Blanchflower disagrees.

“The numbers are going to get worse because the revisions are going to go down,” he said. “The likelihood is that in a year’s time the NBER will call recession as having started in Q1 of 2022. My call is that the recession probably started in the U.S. in the first quarter of 2022.”

AMERICAN EXCEPTIONALISM

Blanchflower said the Fed’s policy approach suffers from being too insular and domestically focused, which makes it miss risks to U.S. growth from overseas.

“You never hear Fed officials talking about global things, they never talk about what’s happening to Europe, what’s happening to Japan. If there’s a global slowing, it’s going to cause the U.S. to slow,” he said. “In Q1 2022, 12 OECD countries have gone negative. What you’ve seen is collapsing consumer confidence. There’s a global recession coming.”

As growth turns into contraction, Blanchflower said inflation figures will start to moderate quickly, and may actually turn negative by next year, as they did during the global financial crisis.

Blanchflower published a paper in October 2021 arguing tanking consumer expectations suggested the economy was already on the verge of recession. Since then, Wall Street recession concerns have risen sharply. He was also one of few central bankers who in April 2008 was predicting a recession when others believed one could be avoided despite the U.S. housing and banking crash.