Recession may be at end – but hold tight for rough ride ahead

Hugo Duncan
20 Oct 2009

Is the recession over? That question will finally be answered on Friday when gross domestic product figures for the third quarter are published.

After the deepest recession since the Second World War, and weeks of debate over whether it has ended, attention will be on the Office for National Statistics like never before.

City forecasters expect growth for the first time since the first quarter of last year but they have been caught out numerous times during the downturn and are far from confident. David Page of Investec predicted growth of 0.2% but said there is “much uncertainty” over the numbers. “We wait with bated breath to see whether the economy emerged from recession,” he said. “On balance, we think it did.”

Jonathan Loynes of Capital Economics said: “The provisional estimate of GDP in the third quarter should show that the economy emerged from recession — just. The recovery has got off to a sluggish start.”

A Bloomberg survey of 33 City economists found predictions ranging from stagnation to growth of 0.7%, with an average of 0.2%. Stagnation or a shock decline would represent the first time since records began in 1955 that the UK economy failed to register growth for six quarters in a row.

This would leave the UK even further behind Europe and the rest or the world in a blow to Gordon Brown, who is pinning election hopes on a strong economic revival.

The pending release of the figures has provoked fresh talk over what path the economy will take in the coming months and years. The Government is standing by its forecast for a powerful V-shaped recovery with growth of 1.25% in 2010 and 3.5% in 2011.

Others are less optimistic. The Ernst & Young Item Club this week pencilled in growth of 1% next year and 2% in 2011 — more robust than its previous forecast but still subdued.

“Although the recession is ending, the UK is in for a VW' shaped recovery as output bumps along the bottom over the next 18 months,” said Item's Peter Spencer.

Nouriel Roubini, the New York professor dubbed Dr Doom for predicting the financial crisis, warned of a drawn-out “U” shaped recovery with “anaemic” growth over the next few years. Sainsbury's chief executive Justin King said a return to growth would be nothing more than “an accident of the maths”. In other words, after falling so far so fast, the economy is bound to expand at some stage but with output so low this hardly amounts to recovery.

As Bank of England Governor Mervyn King said: “It's levels, stupid,” he said. “It's not growth rates, it's levels that matters here.”

There are reasons to be more confident, however. The stock market is certainly pointing towards recovery, with the FTSE 100 index up almost 50% since the low of 3512 in March.

The key services sector, which includes banks and stockbrokers and hotels and restaurants, is also forging ahead and driving growth in the wider economy. The housing market has bounced back from the worst crash in living memory. Buyers are returning and prices are on the rise again.

However, mortgage lending remains muted and prices have largely been forced up by cash-rich buyers and the pitifully low number of houses available to buy.

A new bubble is being created. This is particularly so in London where many first-time buyers are frozen out of the market.

A sudden increase in interest rates, whether it comes next year or in 2011 or beyond, could force thousands of buyers who have overstretched themselves to sell up and depress prices once again.

Unemployment remains an issue despite encouraging figures this month that showed the rise in the jobless total slowed abruptly over the summer. It fuelled hopes unemployment will peak below three million, the dreaded one-in-10 level.

But David Blanchflower, a former member of the Bank of England monetary policy committee and jobs-market expert, dismissed it as “the lull before the storm”.

Vast swathes of the economy, such as manufacturing and construction, remain firmly in recession, and banks are still reluctant to lend despite Government intervention.

This is starving consumers and businesses of the funds to drive the economy. Higher taxes and public spending cuts next year will also act as a brake.

The recession may be officially over — and that is cause for hope — but the British economy remains in intensive care and although it is stable, recovery is a long way off.