What Will The Recession Look Like?

Chris Mullin was regarded as one of the most likeable MP’s in Westminster, serving well before it became poisoned and banalised by the Brexit bullies. He had many talents – a human rights campaigner and notable author. His book ‘A Very British Coup’ is very good and was turned into an excellent tv series. His political diaries are amongst the best of the genre.

Early last week, a particular phrase in those diaries came to mind. In 1997, when Tony Blair had come to power, Mullin wrote ‘To my surprise I notice that Blair is given to mild name-dropping. This week he mentioned that in Holland yesterday he had called on the Queen. The other day, he quoted something Hillary Clinton had said to him. On another occasion, he quoted the president of Brazil, on another that he was off to see the Queen.’

Tony Blair

My memory of this diary entry was twigged on Monday night in Belfast at the dinner to celebrate the 25^th anniversary of the Good Friday Agreement, by the sight before me of Blair, obscuring my view of Bill and Hilary Clinton.

‘Get out of my way man!’ I shouted, as I made my way to see Bill (I did not of course say this, but I did manage to snatch a minute of Bill’s time).

Now that I have gotten my own name-drop out of the way, the real reason I bring up the topic of Bill Clinton is that the economic circumstances of the early part of his presidency give a steer as to what may come next this year.

In particular, with inflation ebbing from high levels fears of a recession are mounting, and institutions like the IMF and the Federal Reserve are warning of this. Macro-wise, lead economic indicators (NY Fed recession indicator, Philly Fed, Conference Board lead indicator) and bank lending data point to a contraction in growth.

While this is now one of the most widely expected recessions (given the debate amongst economists), we should be ready for that debate to amplify with commentators speculating on whether we have a ‘U’, ‘V’ or ‘W’ shaped recession.

Business Cycles

In this context, there has not been a traditional business cycle contraction/recession in a very long time – the COVID recession was a ‘shock’ event, the global financial crisis was a calamitous financial system event, and the 2001 dot.com recession was – apart from the technology and banking worlds – not much of a recession. Then 1997/98 was again a mixture of a bubble and financial market crisis. This leaves the recession of the early 1990’s and its aftermath as one of the few recent examples of an ‘ordinary’ recession.

Of course, the oddity with this litany of financial crises is that central bankers (and their economic models) still think in terms of notional business cycles.

So, back to the Clinton years. Perhaps three things stand out.

High inflation, a war, an oil price shock and rising interest rates all caused the recession of the early 1990’s, and helped deepen the Savings and Loan crisis (a crisis of incompetence and skulduggery). We have just about had all those already. Notably the beginning of the recession ended the political career of George H Bush, who went from having record approval ratings in the aftermath of the Iraq War to a stumble over ‘no more taxes’.

Financially, the aftermath of the recession was very complicated – the ERM crisis led to the ejection of the pound from the currency board, and in 1994 persistent inflation led to a huge unwind in bond prices in the context of ongoing tightening by the Fed. That the Japanese bond market was a significant factor here is worth considering today, given that higher Japanese yields could be the next ‘shoe to drop’.

To gather these strands together, the world is vastly more complicated today than it was in the 1990’s, and the set of risk factors is broader. Of interest also is that the US is not the dominant economy at a time when coordination between the large regions is difficult to achieve.

My expectation is that we are entering into a classic business cycle (U -shaped if you must) that will be greatly complicated by strains across the debt markets. The stark difference between one and three month interest rates in the US is a sign of things to come, and specifically of a messy debt ceiling debate in the USA. If interest rates remain at high levels in 2024, and if they rise further in countries like Japan and the UK, then we might even have a debt crisis.