Only a brutal Darwinian process can reset Britain’s economy

Whatever your thoughts on the Nigel Farage debanking debacle, it has reminded us of a remarkable fact – that 15 years after the financial crisis, the taxpayer is still a near 40pc shareholder in one of the UK’s largest banks.

This is what gave the Government the power to step into the affair and, over the heads of the NatWest board, insist on the sacking of the chief executive, Dame Alison Rose.

Were it not for this stake, any retribution would have been left to investors, regulators and the hound dogs of the media.

Very likely, the board could have brass-necked it out. Ministers like to pretend an arms-length relationship, but in reality NatWest might as well be a fully nationalised bank.

What is the Government still doing with such a large ongoing interest, and what does it tell us about the UK economy?

At the time of the financial crisis, the US federal government similarly took big stakes in major banks to stem the panic. Yet all these holdings were disposed of years ago, since then the US economy has bounded back, far outstripping the UK and the rest of Europe.

Progress has admittedly been made in selling down the NatWest stake, which once stood at more than 80pc. But political squeamishness at being seen to sell at a loss for the taxpayer has stunted the process.

Private capital still regards the bank as essentially just a ward of the state, or not a proper business at all in the sense of one that is free to operate and chase the money as it sees fit – as do the likes of America’s JP Morgan Chase.

In the UK and Europe, by contrast, we remain stuck with the legacy of what happened all those years ago. It is as if we have not moved on at all – as indeed we haven’t, looking at the becalmed state of real income and productivity growth.

So when the big wheels of Downing Street talk about light at the end of the tunnel, the resilience of the jobs market, superior growth to Germany and whatever else can be scraped from the bottom of the barrel in terms of positive spin, they are just kidding themselves.

We’ve spent more than a decade desperately trying to avoid a recession by propping things up with near free money, but little good has it done us. The end result is mountainous debt, rampant inflation and a government poised to reap the whirlwind with a crushing election defeat.

Ministers went against every Tory instinct in their bodies in trying to do the right thing by the pandemic with an almost socialist approach to the threat – but by paying people to stay at home, they virtually bankrupted the country.

They did the same again with the energy crisis, plying the economy with an average of £1,500 per household in an effort to keep the inflationary monster at bay.

Yet to his evident dismay, the prime minister, Rishi Sunak, gets little credit for any of it; instead the overpowering sense is of an economy where living standards and prosperity are slipping ever further behind.

We may have something close to full employment, but almost everyone is dissatisfied in some way or other.

Policy action prevented the financial crisis from turning into a fully blown depression, yet it has left the economy stranded in a no-man’s land of stagnation and relative decline.

The reset in asset prices, capital allocation, and productive capacity implied by a proper recession would in some respects seem preferable.

Real estate prices would correct appropriately, debt would restructure and much of the chaff at the heart of Britain’s productivity problem would be removed.

As it happens, a recession may indeed be what we are about to get, though this isn’t what most economists are expecting. Instead, they talk of soft landings and, as inflation falls, the resumption of real income growth.

I’d be amazed. The Government and Bank of England have nailed themselves to the cross of getting inflation back to target. To me, it seems implausible that it can be done without inducing a recession.

The scale and speed of today’s rise in interest rates looks set to deliver precisely that. Past recessions have admittedly tended to be preceded by even fiercer monetary tightening.

For instance, the equivalent of today’s Bank Rate rose all the way from 5pc to 17pc between October 1977 and November 1979, and from 8pc to 15pc between June 1988 and October 1989.

What makes the speed and size of the present tightening different, and therefore potentially even more deadly, is that it comes after such a prolonged spell of near-zero interest rates.

Relatively expensive money is just not something we are used to, or have planned for.

It’s true that so far the Bank of England’s actions have been surprisingly slow to act on demand and jobs. This has been widely attributed to the cushioning effect of the savings surplus built up during the pandemic and the shift in the mortgage market to fixed rate deals.

More people also own their houses outright than in previous cycles. Higher mortgage costs are therefore on a slower burn. Together with the subsidence in energy prices and the deflation beginning to take hold in China, that’s led some to conclude that the old rules no longer apply.

Don’t be so sure. What’s clear is that rates won’t be coming down for some time.

Wage growth of 8.2pc, as reported last week, is not compatible with a 2pc inflation target. Eventually, there has to be a reckoning. Excuse the cliché, but it’s only when the tide goes out that you get to see who’s been swimming naked. I fear it’s a lot when it comes to the UK.

We more or less know where Britain’s productivity problem lies. Partly, it’s down to an oversized service sector, where productivity improvement is notoriously difficult to achieve.

A strongly growing public sector, with state spending swollen to more than 45pc of GDP, further raises the bar.

The supposedly transformative power of artificial intelligence in these stubbornly resistant parts of the economy has yet to be felt. Believe the promise if you will.

But the absence of recession has also stunted productivity gain across the economy as a whole. Among most of our leading companies, productivity isn’t a problem; it’s up there with the best in the world.

Unfortunately, there is a long tail of small and medium sized companies – the great hinterland of the economy, in other words – where this is not the case.

Many of these enterprises have for years struggled to keep their heads above water. The zero interest rate environment is about the only thing that’s kept them from going under.

Overall productivity won’t increase until the dead wood has been cut away. It’s a brutal, but necessary, Darwinian process. Sadly, it usually takes a bad recession to make it happen.