City of London bosses have warned that the UK faces a damaging recession later this year and raised fears that managers lacked experience in dealing with severe economic shocks.
The FT’s City Network, a forum of more than 50 senior executives from finance, business and policymaking, said that policymakers faced difficult decisions on 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 a recession looks real . . . Even if we miss a technical recession, we see a weak outlook for growth. Stagnation is a clear possibility.”
Anne Richards, chief executive of Fidelity International, said the key risk to economic stability was “stubbornly high inflation, even as demand slows, which forces the central bank to keep hiking into a sustained and deep recession”.
Economists have said it is increasingly likely that the UK will sink into recession this year. The Paris-based OECD last week cut its UK growth forecast for 2023 to zero, the lowest in the G20. The Bank of England raised interest rates to 1.25 per cent last week to tackle fast rising inflation, which is expected to reach 11 per cent by October.
Paul Drechsler, former president of the CBI and chair of lobby group London First, warned that recession was likely to hit many major economies — the “key questions are how deep and how long”, he added.
Sir Win Bischoff, a senior banker and former chair of Lloyds Banking Group, added that policymakers needed to decide whether to pursue “a short, sharp shock or a slow but ultimately more painful reduction in GDP”.
“Central bank orthodoxy almost universally would suggest the former but political sensitivities incline towards the latter. Even without any drastic action by the central bank, it is possible that the UK could face a recession.”
Low unemployment and high consumer spending offered positive signs, according to Ann Cairns, vice chair of Mastercard.
But she added: “Despite this consumer spend, we may be at the start of a recession. One where business leaders, policymakers and central bankers might see themselves as wartime leaders. Not just because of war in Ukraine but because of all the supply side shocks we are living through coming out of Covid.”
With inflation set to rise in the autumn to as high as 11 per cent according to the Bank of England, alongside continued energy cost hikes and disruption because of war in Ukraine, many City bosses identified the threat of sustained economic pressure.
Mervyn Davies, a senior banker and former Labour minister, said that it felt “as if the world has changed for the worse in a very fundamental way during the past few months”.
“It will not return to the previous normal in the foreseeable future,” he said. “Energy cost disruption, supply chain dislocation, vicious cost of living increases, shortage of key materials are just a few of the huge pressure points.”
Even with the cost of living crisis dominating the headlines, Andreas Utermann, chair of Swiss investment group Vontobel and former chief of Allianz Global Investors, said that “almost everyone is underestimating the inflation risk”.
The sort of downturn triggered by supply side shocks was not something that had been seen by most managers and investors, according to City leaders.
“The natural inclination of company boards, embedded over their experience of the last several decades, may well be to make short-term decisions based on the environment we are leaving behind rather than the one we now face, and as a consequence pivot too late,” said Richards.
The experience of dealing with a recession “lies far in the past in the minds of by now retired managers and mistakes are bound to be made by their successors”, Bischoff also warned.
Sustained stagflation — the combination of high inflation and low growth — appeared to several of the City Network to be less of a risk.
James Bardrick, head of Citi in the UK, said the Queen’s platinum jubilee celebrations seemed to have helped the economy avoid the hard “headline” of technical recession.
He added that the UK was on course to suffer two negative, nonsequential quarters of GDP growth in the second and fourth quarters — but the “ghastly stagflation of the type that I experienced as a youngster in the 1970s” was less likely.
Many also raised concerns about government policy, including the destabilising impact of the threat of a trade war with the EU over Northern Ireland.
Most argued that the government needed to work more closely with business to weather the period of economic disruption.
Cairns said that business and government leaders needed “to keep an eye on the longer term, as short-term cuts and short-sighted decisions can be very harmful”, pointing to the need for continued investment in net zero carbon emission strategies.
“Clear and consistent policy direction stimulates the confidence and certainty businesses need to continue investing in the UK,” said Blanc.
Former BT and KPMG chair Mike Rake worried that the government did not appear to have a clear or coherent strategy for handling the downturn, however.
“It seems to be distracted by divisions within its own party and short-term politics seemingly aimed to divide rather than unite the UK whilst damaging our reputation and influence internationally.”
Davies noted that there was a wider societal impact to consider. “Today we all face a very uncertain future . . . my worry is whether the global political elite can handle this and ensure the divides in society do not widen.”
But Guy Hands, boss of private equity group Terra Firma, said that he was “not sure if there is any way to protect wealth in a situation closer to the late 20s and early 30s than the 70s.”
“We might actually see the top 25 per cent of society getting closer in wealth to the bottom 25 per cent but not through a levelling up,” he added.