Are we heading for a dramatic recession or what some economists refer to as a necessary period of adjustment? History may well provide the answer

In his blog, BBC economics editor Evan Davis admits to a dispute with former US Treasury Secretary Larry Summers over whether or not there is such a thing as a "cathartic" recession. Davis argued that some form of correction or rebalancing in the economy was necessary and should be tolerated in the interests of long-term economic stability. Summers, on the other hand, maintained that there was no such thing as a "necessary" recession. His view is that the Federal Reserve System is correct to enter into a period of fiscal stimulation to prevent the otherwise inevitable slowdown in US consumer spending. If you point to the fact that there is a recession and that it is useful, he says, this in itself creates a recession, which may spiral into something serious and damaging. The Fed's knee-jerk reaction in January was, in fact, a considered psychological boost to the economy.

Economies do slow down as a natural part of the business cycle and economists such as Roger Bootle have been predicting the current crisis for some time. In 2005, Bootle argued in the Deloitte Quarterly Economic Review that there would need to be an overall economic adjustment in the UK in order to cope with two things: levels of debt in the financial markets fuelling hedge funds and private equity and, our old friend, the overly strong UK housing market. In the event, the 2005 "crisis of adjustment" never happened. But Bootle could argue that the severity of what is happening now will be greater because we didn't have a correction in 2005.

So are we going into a recession? And if we are, will it be an adjustment or something more dramatic? Economics is an imperfect science and even the Treasury now averages out 31 different forecasts to make its predictions. But if the economists are right, this is the adjustment that many have been predicting for a couple of years. The UK economy has remained resilient through the first few years of the 2000s and with house prices and borrowing resolutely high, it was inevitable that the bubble would burst. While things might be bumpy during 2008, even Bootle expects interest rates to fall so far that growth will be restored during 2009. In other words, if we do have any kind of slowdown, it will be an adjustment rather than "dramatic".

And so to the lessons from history. "Dramatic" recessions are like those in the early 1980s, when the impact was profound: the base of the UK economy altered its structure, became more global and more reliant on the liberalised credit markets. In short, we became more like the US economy. 
Some economists argue that the recession experienced by the US in the early 1990s was a dramatic one caused by the need to recalibrate the economy to meet the challenges of new technology, innovation and fast growth through entrepreneurship. Although the structures were in place way before the 1990s, the reorientation of the US economy during that decade generated an endogenous growth behind its productivity miracle.

The end of the dotcom boom was the necessary adjustment and arguably shifted the US economic bubble from the dotcoms to the housing market.
What can we learn from this? If we are more like the US economy than ever before, and if we have been experiencing similar consumer-led growth over the last 10 years prompted by high house prices and loose lending, then we too can expect to have an adjustment now, but not a recession. 
We are an innovative and entrepreneurial nation, but we are by no means as innovative and entrepreneurial as the US. Any readjustment now should be offset by long-term investment in our enterprise infrastructure.

We should be looking more carefully not only at the innovation challenges from the US, but also at those from China, India and the emerging economies of Europe. We can remain competitive and withstand the current crisis. But we need to grow our science and technology base and accelerate its links with innovation-led entrepreneurship if we are to avoid a more dramatic recession in the future.

Rebecca Harding is managing partner of Delta Economics and a director of GEM UK