Policy may be constrained by the fact Bank has already deployed its tools to curtail the last recession

Britain is facing the highest risk of a recession since the financial crisis and needs urgent plans to combat the next downturn, according to an alarming assessment of the nation’s economic health.

Preparations need to be made to reduce the impact, the study by the Resolution Foundation thinktank warns. It states that both uncertainty around Brexit and the global economic slowdown have led to the highest recession risk since 2007.

It raises the alarm over the potential impact on living standards, warning that the five previous recessions have produced an economic shock equating to a £2,500 loss for each household in the UK. They have also increased unemployment by one million.

It comes after a series of warnings over the health of the economy amid continuing uncertainty around Britain’s EU membership. Earlier this month the governor of the Bank of England, Mark Carney, warned that there had been a “sea change” in the world’s financial markets, driven by pessimism about the economic outlook.

The National Institute of Economic and Social Research, one of the UK’s leading economic forecasters, said last week that the UK would only “narrowly avoid a technical recession”, with growth of 0.2% in the third quarter following a decline of 0.1% in the second quarter. A technical recession occurs with two consecutive quarters in which the economy shrinks.

Meanwhile there have been warning signs in the construction industry. The Chartered Institute of Procurement and Supply has warned the political paralysis gripping Westminster has left the industry trapped in “quicksand”, with house buying and new orders dropping “like a stone”.

There are also concerns that the government and Bank of England have already used many of the tools in their armoury that could curb a future recession. Cutting interest rates to stimulate the economy is hard, as they are already at historically low levels, while quantitative easing (QE), in which more money is pumped into the economy, is likely to have less effect than in the past.

Had those weapons not been deployed during the last recession, in which interest rates were cut from 5.75 per to 0.5 per cent, QE amounted to £375bn and VAT was cut to 15%, the downturn would have been 12%. That is the equivalent to £8,000 for every UK household.

The Resolution Foundation also warns that it would be dangerous to assume that the next recession will be the same as the last, when major job losses were avoided. It states that it may not be the case that the big unemployment increases that characterised the 1980s and early 1990s recessions have been consigned to history. “This all means the UK needs a new plan to respond to the next recession and, whether or not a downturn starts in the near future, planning for it certainly should,” it concludes.

The recession warning comes in the Resolution Foundation report Failing to Plan = Planning to Fail, the first of a series looking at the impact of recessions on low-and-middle income households. The foundation’s “recession risk” indicator, which uses yields on government bonds to assess the threat from a recession, suggests that Britain’s recession risk has risen to its highest level since 2007.

Whether or not a downturn starts in the near future, planning for it certainly should James Smith

James Smith, its research director, warned against complacency. “Ten years on from the end of the last downturn, the UK’s recession risk is at its highest level since 2007, with growth slowing at home and abroad, and widespread uncertainty around Brexit,” he said. “While recessions differ in terms of the cause and effect, they are all uniformly bad for living standards. The average economic hit from the last five downturns has been equivalent to £2,500 for every household in Britain, and a million people losing their jobs.

“Policy-makers can’t prevent recessions from happening, but they can limit their damage with the right policy response. The problem for the incoming government and the Bank of England however is that many of the tools used to fight the last downturn – from big interest rate cuts to £375bn of QE – are either spent or severely blunted. So whether or not a downturn starts in the near future, planning for it certainly should.”