Forget the end of recession, recovery is a long way off

Hugo Duncan
16 Jun 2009

"The recession has ended" screamed the headlines, and well it might have. After a year of economic decline, from a slight contraction in the second quarter last year to a vicious slump of 1.9% in the first quarter this year, things are looking up.

A leading London think-tank, the National Institute of Economic and Social Research, reckons the economy hit rock bottom in March and started growing again in April and May.

It fuelled hopes that Government figures next month will show gross domestic product increased in the current second quarter, meaning the recession is officially over.

Others are not so sure. The CBI does not see a return to growth until early next year, and even then it will be pretty anaemic. But either way, the worst seems to have passed.

The brighter outlook has certainly pleased the City and Downing Street but no matter what form the recovery takes there is still one problem that will not go away: unemployment.

Figures tomorrow will show that another 200,000 to 250,000 workers lost their jobs in the three months to April, pushing the unemployment rate up further above 7%, the highest level since 1997.

That amounts to some 2.25 million people, and the number looks set to head towards or even over three million - the dreaded 10% - by the middle of next year.

Tomorrow's numbers will also show a jump of around 60,000 in the claimant count in May, to nearly 1.6 million. So not only is the Treasury losing income tax revenues but the dole queue is getting longer and ever more expensive.

Previous recessions show it takes a long time for unemployment to start falling again. Unemployment was rising for a year or so after the recession ended in the early 1990s.

Given that this recession is far deeper, the debt problem greater and bank lending is still restricted, job losses could go on for even longer.

And beware the double-dip, or a "W-shaped" recession, as happened in the 1990s. After five quarters of decline, the economy returned to growth at the end of 1991 only to shrink again at the start of 1992.

A similarly bumpy road to recovery is possible this time around, prolonging the misery of unemployment.

So far in this recession, output has fallen a whopping 4.1%, and more than half a million people have lost their jobs. In the 1990s recession output shrank 2.5% and one million were left out of work. Even if the economy starts growing again this year, unemployment will not stop rising until growth returns to normal levels of around 0.7% a quarter - something unlikely to happen for at least a year.

Here's what George Buckley, the respected Deutsche Bank economist, has to say: "With unemployment tending to lag developments in the real economy, which remains in recession, we are probably only half way through the total adjustment in unemployment, both in timing and total increase."

So the backdrop to the next general election - spring next year at the latest - will be of rising unemployment even if the recession is over.

It will certainly be an issue in London where the unemployment rate is higher than in the country as a whole at 8.2%. Some 68,000 Londoners have lost their jobs since the start of the recession, taking the total to 333,000, and by no means are they all in the City and Canary Wharf. While many firms are dealing with recession well, hundreds more in the capital are struggling, stores on the High Street are closing, and hiring levels remain desperately low.

Another key issue for the economy and for Gordon Brown and David Cameron is youth unemployment.

There were 676,000 people aged 18 to 24 out of work at the end of March, compared with 512,000 a year earlier. The rate of unemployment in this age group is 16.1%, the highest since 1994. There is likely to be a spike in these numbers over the summer as school leavers and university graduates go in search of work only to find there are very few jobs available.

A report by the Higher Education Careers Service Unit reckons that 40,000 new university graduates will still be out of work in six months' time and the number of unemployed under 25 could reach one million.

So while things are looking up for the UK economy - as they undoubtedly are - the harsh reality of unemployment bites. Try telling the thousands of graduates and the thousands more workers who have lost their jobs at Cheltenham & Gloucester, Woolworths, BT, LDV and the rest that the recession is over.