City of London bosses have warned the UK will face a damaging recession later this year and raised fears that leaders lack the experience to deal with severe economic shocks.
The FT’s City Network, a forum of more than 50 senior finance, business and policy-making executives, said decision-makers faced tough decisions about how to mitigate the worst effects of an economic downturn.
“It’s not pretty,” said Amanda Blanc, chief executive of Aviva, the insurer. “The risk of recession seems real. . . Even if we miss a technical recession, we see weak prospects for growth. Stagnation is an obvious possibility.
Anne Richards, chief executive of Fidelity International, said the main risk to economic stability was “stubbornly high inflation, even as demand slows, forcing the central bank to continue sinking into a prolonged recession and deep”.
Economists have said the UK is increasingly likely to slide into recession this year. Last week, the Paris-based OECD slashed its growth forecast for the UK for 2023, the lowest in the G20, to zero. The Bank of England raised interest rates to 1.25% last week to combat rapidly rising inflation, which is expected to reach 11% by October.
Paul Drechsler, former CBI chairman and chairman of pressure group London First, warned the recession could hit many major economies – the “key questions are how far and how long”, he said. he adds.
Sir Win Bischoff, senior banker and former chairman of Lloyds Banking Group, added that policymakers had to decide whether to pursue “a short, sharp shock or a slow but ultimately more painful reduction in GDP”.
“Central bank orthodoxy would almost universally suggest the former, but political sensitivities lean towards the latter. Even without any drastic central bank action, the UK could face a recession.
Low unemployment and strong consumer spending offered positive signs, according to Ann Cairns, vice president of Mastercard.
But she added: “Despite this consumer spending, we may be at the start of a recession. A world where business leaders, policymakers and central bankers could see themselves as wartime leaders. Not just because of the war in Ukraine, but because of all the supply side shocks we are experiencing coming out of Covid.
With inflation expected to rise in the fall to 11% according to the Bank of England, alongside continued rising energy costs and disruption from the war in Ukraine, many city bosses have identified the threat of sustained economic pressure.
Mervyn Davies, a senior banker and former labor minister, said it was “as if the world had changed for the worse in a very fundamental way over the past few months”.
“It will not return to previous normal for the foreseeable future,” he said. “Disrupted energy costs, supply chain dislocation, viciously rising cost of living, shortage of key materials are just a few of the huge pressure points.”
Even with the cost of living crisis in the headlines, Andreas Utermann, chairman of Swiss investment group Vontobel and former director of Allianz Global Investors, said “almost everyone underestimates the risk of ‘inflation”.
According to City executives, the kind of downturn triggered by supply-side shocks hasn’t been seen by most managers and investors.
“The natural tendency of boards, rooted in their experience over the past decades, may well be to make short-term decisions based on the environment we leave behind rather than the one we face today. , and therefore pivoting too late,” Richards said.
The experience of managing a recession “is far in the past in the minds of now-retired managers and mistakes will inevitably be made by their successors,” Bischoff also warned.
Sustained stagflation – the combination of high inflation and weak growth – seemed to several members of the City Network to be a lower risk.
James Bardrick, head of Citi UK, said the Queen’s Platinum Jubilee celebrations appeared to have helped the economy avoid the harsh “headline” of the technical recession.
He added that the UK was about to suffer two negative, non-consecutive quarters of GDP growth in the second and fourth quarters – but ‘horrendous stagflation of the kind I experienced as a youth in the 1970s’ was less likely.
Many have also raised concerns about government policy, including the destabilizing impact of the threat of a trade war with the EU over Northern Ireland.
Most argued that the government needs to work more closely with businesses to weather the period of economic disruption.
Cairns said business and government leaders must “keep an eye on the long term because short-term cuts and short-sighted decisions can be very damaging”, stressing the need for continuous investment in net-zero carbon strategies.
“Clear and consistent policy guidance drives the confidence and certainty businesses need to continue investing in the UK,” Blanc said.
Former BT and KPMG chairman Mike Rake, however, was concerned that the government did not appear to have a clear or cohesive strategy for dealing with the crisis.
‘He appears to be distracted by divisions within his own party and the short-term policy is apparently aimed at dividing rather than uniting the UK while damaging our reputation and international influence.’
Davies noted that there was a wider societal impact to consider. “Today we all face a very uncertain future… my concern is whether the global political elite can handle this and ensure that the divides in society do not widen.
But Guy Hands, boss of private equity group Terra Firma, said he was “not sure there is a way to protect wealth in a situation closer to the late 1920s and early 1920s. 30s than 70s.
“We could actually see the top 25% of society getting closer in wealth to the bottom 25%, but not by a leveling up,” he added.