Strikes aren’t the cause of the recession – but they’re not helping either

For UK economy-watchers, figures to be published on Friday have taken on great significance. Though they will not provide the definitive answer on whether the UK has formally entered recession, two and a half years after entering the last one, they will provide a pretty good indication.

The figures for monthly GDP in November will tell us whether economic activity is heading for a second successive quarterly fall, after the 0.3 per cent drop in the third quarter of last year. That would meet a commonly used recession definition.

Some economists think it will be a dead cert, others a close call. All can agree that the economy stopped growing around March last year and has been flatlining, at best, since then.

Non-economists would say it is not surprising the economy is in trouble given the wave of strikes crippling the railway network and large parts of the public sector. The UK has been flirting with a repeat performance of the “sick man of Europe” act it was once famous for.

That the strikes are having a negative effect is not in doubt. Ask the hospitality sector, battered from all sides and reeling from lost revenues because of train strikes. This winter of discontent is having a real impact as well as causing massive inconvenience.

It is, however, not as straightforward as it may appear. When the trains are not running, economic activity is displaced rather than cancelled; hence all those stories and surveys about suburbs and smaller towns doing well while city centres suffer. For those who can, working from home — the economy’s lifesaver during the pandemic — means it is possible to function, even when the trains are not.

Simon French, chief economist at Panmure Gordon and a regular in these pages, has attempted to put numbers on the impact on GDP of the strikes since the summer. His best guess is that they have knocked a net 0.25 per cent off GDP, though that effect could be getting slightly bigger with the recent intensification of strike activity. The strikes are contributing to the economy’s weakness but are not its cause, where the main factor is the energy shock, which through the cost of living crisis is driving union militancy.

For really big impacts on GDP of strikes, you have to go back. Before the pandemic, the biggest modern-day quarterly fall in GDP was in the first quarter of 1974, 2.8 per cent, when in response to a miners’ strike and the oil crisis the government imposed a three-day week.

Everybody knows about the winter of discontent of 1978-79 — the dead not being buried, rubbish piling up in the streets, etc — which helped to propel Margaret Thatcher to election victory in May 1979. Its effects can clearly be seen in the economic data. GDP fell by 0.5 per cent in the first quarter of 1979, the height of that winter of discontent, but bounced back by 4.4 per cent in the second quarter, as the days lost due to industrial disputes fell sharply.

Not a lot of people know, to channel Michael Caine, that there was another wave of strikes soon after Thatcher was elected. In August and September 1979 she faced her first big union confrontations. September that year was extraordinary, with 11.7 million working days lost due to strikes, four times the maximum monthly number during the winter of discontent and a record in data that stretches back to 1931. The result was a 2.2 per cent drop in GDP in the third quarter of 1979, though that did not mark the start of the first Thatcher recession, which was at the beginning of 1980.

The next episode was a few years later and the miners’ strike of 1984-85, led by Arthur Scargill. When many miners walked out in March 1984, the loss of their production — in a country still quite reliant on coal — resulted in a 1 per cent drop in GDP in the second quarter of that year.

There are several reasons why we are not seeing those effects now. In a mainly non-unionised economy, strike action is a shadow of what it used to be. The Office for National Statistics will soon provide new data, but its latest figures show that a total of 1.16 million days were lost because of industrial disputes between June and October. That, over five months, is higher than the pre-pandemic norm but low in comparison with strike waves of the past.

GDP is not everything, however, and while the walkouts have not caused a recession that may or may not become a certainty this week, their effect is more insidious. Train strikes mean people can no longer trust what for many was an essential service. Event organisers now play roulette, hoping that they do not settle on a date that coincides with fresh stoppages.

Everyone else prays they will not need the NHS at this time. The strikes have exposed deep structural weaknesses in the affected sectors. National rail use appears to have settled at between 80 and 85 per cent of pre-pandemic levels, pending any further permanent reduction because of the strikes. The Institute for Fiscal Studies exposed what it described as a “concerning” puzzle for the NHS which, despite more staff and funding, is treating fewer patients in most types of care than before the pandemic. The answer may be a prolonged Covid hangover and an inability to discharge patients from hospitals into care, the perennial problem.

Rishi Sunak’s government, meanwhile, in its conduct of the disputes, is doing little to embellish its reputation for competence, though it appears to be inching forwards. Reform is needed but trying to shoehorn it into fractious pay talks at a time of double-figure inflation, or more usually non-talks, will never work. Ministers have been confusing stubbornness with strength. One of the country’s strengths in the post-Thatcher era was improved industrial relations. Presiding over a country in which nothing seems to work, and strikes have become the norm, is the last thing the UK needs.

Original article here: https://www.thetimes.co.uk/article/strikes-arent-the-cause-of-the-recession-but-theyre-not-helping-either-fbnbdvfwx

Author: David Smith, The Times

Simon French

Managing Director, Head of Research