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The hidden recession of 2020

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After 20 months of economy-wrecking lockdowns and restrictions, 2019 is fondly remembered as a period of prosperous calm.  Memories though, are deceptive.  And in the days before we learned what gain-of-function meant, things were not as rosy as they now seem.  Although the decade 2009-2019 was officially one of the longest periods of economic growth ever recorded, the rate of growth was anaemic – the media reporting on any quarter with more than 1.0% growth as if it heralded a return to the 1960s.  And what growth there was owed more to additional debt than to improvements in productivity.  The reality of the post-2008 years was of the mergence of an 80:20 economy in which the majority watched their prosperity evaporate, while a shrinking metropolitan salaried class fought a rear-guard defence of their income and status.

The political dam broke in 2016, with “the revenge of the places that didn’t matter” – aka Brexit and the election of Donald Trump.  But few in the salaried class understood the economic decline which had spilled over into the political arena; preferring instead to blame it all on Russian bots.  Nevertheless, whether the elites and their salaried lapdogs chose to understand the economic situation or not, the process of decline continued.

In the UK, Christmas 2018 had been the worse on record… until Christmas 2019 rolled around.  And whereas Christmas 2018 had seen a big decline in discretionary spending, Christmas 2019 produced the first indicators of a decline in borderline essential spending too.  We might choose to regard the humble Christmas pudding as something which can be lived without – although those who lived under Cromwell’s puritanical dictatorship might beg to differ – but a decline in sales – along with those of turkey and seasonal biscuits – points to a nation which was reining in its spending long before SARS-CoV-2 embarked upon the European leg of its world tour.

Figures from the UK Office for National Statistics show a growth rate of 0.0% for the fourth quarter of 2019, while the first quarter of 2020 – prior to the arrival of Covid – saw a decline of -2.7% as the Christmas slump fed through to the wider economy:

Needless to say, this recessionary beginning to the new decade was quickly eclipsed by the self-inflicted collapse which followed the imposition of the first lockdown at the end of March 2020.  The second – lockdown – quarter of 2020 saw a massive collapse of -19.6%, although this was played down in the media once quarter three had produced an impressive 17.4% bounce back…  bought at the cost of massive government borrowing and central bank currency creation, whose true cost we will only discover in the course of the next decade.

Understandably, the bankers, politicians and establishment media have been keen to promote ideas about a “great reset,” a “new normal” and “building back better;” equating the promised recovery from the pandemic with the boom which followed the post-war reconstruction in western Europe, the USA and Japan.  This though, is to ignore both the structural causes of the 2008 crash and the prevailing economic decline of the decade following it.

The shorthand version of this can be simply stated as a world which is running out of power.  The long history of this can be divided into four phases.  The first, from around 1970 through to the mid-1980s, involved the end of the exponential growth of surplus energy which underpinned the post-war boom.  Beginning with the peak of land-based oil extraction in the USA (excluding Alaska) which fed into the collapse of the Bretton Woods monetary settlement and paved the way for the 1973 and 1979 oil shocks, we witnessed government economic policies which had previously generated growth in output, productivity and prosperity producing their opposite in the form of stagnation and inflation.  The second phase – which was a response to the previous crises – began with the “Big Bang” deregulation of banking and finance, which ushered in the debt-based boom of the 1990s and early 2000s.  This “neoliberal” economy was holed beneath the waterline by the global peak in conventional oil extraction in 2005.  The resulting price increases and the ill-conceived hike in interest rates set in chain the series of debt defaults which threatened to bring the system down in 2007-08.

The third phase equates to what Charles Hall has called “the bumpy plateau.”  A combination of low EROI unconventional oil and high-risk monetary policy produced the anaemic GDP growth of the decade prior to the pandemic, in which a shrinking minority has maintained its prior prosperity while the majority have become poorer.  This decline is worse than the official figures suggest because the price of essential items like housing, food and utilities has been rising far more than the cost of discretionary items.  Like the debt-based economy of the 1990s, the QE-underpinned economy of the 2010s had a limited lifespan until and unless someone could come up with a high-density energy source to replace the declining surplus energy derived from fossil fuels in general and oil in particular.

Unnoticed by almost all of the nearly eight billion humans on planet Earth, global oil extraction – conventional and unconventional – peaked in 2018.  Insofar as this was commented upon in the establishment media, it was portrayed as evidence of peak oil demand – the mythical claim that our puny efforts at building electric cars has somehow caused demand for oil to decline, when it was clearly the supply of oil which was disappearing.  Most of our political class comforted themselves with the utopian fantasy that we stood on the edge of a fourth industrial revolution powered by wind and non-existent green hydrogen.

The arrival of the pandemic has been fortuitous insofar as the various lockdowns and restrictions, together with the discovery that a large number of us can work from home, produced a decline in energy demand which almost compensated for the loss of supply.  But energy decline is remorseless.  And in a world that still depends upon oil – and especially diesel – to power its transport networks and almost all of its heavy machinery in mining, heavy industry and agriculture, oil depletion eventually results in everything depletion.

Europe – the first part of the world to industrialise – is in a particularly weak position.  Having already depleted most of its mineral and fossil fuel reserves, the remaining oil and gas in the North Sea was the only thing preventing a Europe-wide economic collapse as the continent ran out of power.  But the North Sea deposits were all too finite.  Britain’s oil and gas peaked in 1999 and were producing just 40 percent of their 1999 output by 2020.  Exports from Norway (with a population just 8 percent of the UK’s) obscured the problem, while the promise of opening up tiny deposits like Cambo, held out the promise of maintaining business as usual.

In the wake of the 2018 peak, and exacerbated by the pandemic, oil companies cut their investment in oil extraction.  The result was that when economies around the world attempted to unlock, demand outstripped supply; sending wholesale prices up above $80 per barrel.  In the UK, this has resulted in recession-inducing fuel prices above £1.45 per litre ($7.30 per US gallon). 

Unexpectedly, it has been gas rather than oil which has created the bigger post-pandemic shock in Europe.  As with oil, the simple reason for this is that there is no longer enough to go around.  But this is about more than depletion.  The so-called “green” energy policies adopted across the EU – and particularly in the UK – at the height of the debt-based boom of the early 2000s, created an over-reliance on intermittent forms of electricity generation.  The hope had been that someone would come up with a viable – low-cost but high-density – means of storing excess energy for use in periods when demand outstripped supply.  No such storage technology was invented.  And so, we ended up turning to gas as backup – while claiming it to be a “transitional” fuel.  This was foolish in the extreme in a part of the world which freezes in winter, and which depends upon gas for most of its heating and cooking.  Nevertheless, by the autumn of 2021, European dependence upon a fossil fuel which was depleting, and which is difficult and expensive to import in compressed form from regions that still have a surplus, was enough to drive wholesale prices up by more than 400 percent!  As of yesterday – 14 December 2021, the UK wholesale price of gas stood at £3.27 per therm – up from just £0.50 a year ago.

This has already resulted in the collapse of 28 energy supply companies in the UK, although the full impact will only hit UK households from April 2022 when the current price cap is lifted.  This is expected to add more than £400 to the average bill next year.  Nevertheless, with millions of households already facing a hard choice between food and heat, a massive shift away from discretionary spending is now inevitable, particularly when combined with the rising price of fuel and food.

Unfortunately, the anomalous economic events of 2020 work to hide the growing predicament facing us.  Because most of our statistical data is year-on-year, current headline figures on key indicators like GDP and employment appear far too positive.  GDP growth since December 2020 is in double figures, but compared to February 2019 it is still negative.  It is the same story with employment, unemployment and underemployment.  The second quarter of 2020 saw a massive wave of redundancies, followed by a bounce back in quarter three, another slump in Q1 2021, another bounce back and another slump.  The total hours worked is perhaps the most important figure since the headline employment figure includes anyone receiving a wage, irrespective of whether full-time, part-time or self-employed.  Importantly, in a healthy economy we would expect the number of hours worked to be increasing:

It is not uncoincidental that we see the same – albeit small – downturn in Q3 of 2021, which was supposed to be the launchpad for Chancellor Sunak’s high-skilled, high-paid economy of the future.  And were Sunak’s words mere rhetoric, this might not matter too much.  But Sunak has bet the house on growth rates last seen in the early 1960s.  And any wavering at this point will spell serious trouble in the new year, when we will be hit with a series of tax increases, public spending cuts and possibly interest rate rises on top of the rising cost of essentials that are already beginning to bite.

While it is impossible to prove a counterfactual, it is not beyond the bounds of possibility that the slight downturn in GDP and in employment is actually the “new normal” that we would have reached had there not been a pandemic.  That is, after the recession of Q1 and Q2 of our alternative 2020, the economy might have bounced along the bumpy plateau for a few more years at a little less than the rate it had reached in 2018.  As it is, the response to the pandemic has accelerated a raft of negative economic trends which are only now beginning to register in the mainstream. Nevertheless, in economic terms at least, today is likely to be the best day of the rest of our lives.

As you made it to the end…

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