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The recession is finally over — just. Figures today show the UK economy grew by 0.1% in the final three months of 2009 following the biggest bust on record, stretching back to April 2008.
The long-awaited return to growth was widely expected — unemployment has stopped rising, at least for now, and confidence among consumers and businesses is steadily improving. But the growth figure is well below the 0.3% or 0.4% hoped for in the City and Westminster, where the reaction is one of muted relief rather than euphoria.
Other major economies such as the US, France, Germany and Japan pulled out of recession months ago and there are serious doubts over the strength of the recovery in the UK. Gordon Brown says: “The world and the UK economy remain fragile.”
The Government and the Bank of England expect moderate growth this year followed by strong growth in 2011 and beyond as the UK bounces back from the recession. Independent forecasters in the City are less bullish, predicting moderate growth for the next few years as the economy stutters and unemployment remains high.
Pessimists warn of a dreaded “double-dip”, where growth falters and the UK tips back into recession. A number of factors will dictate the outcome.
Consumer spending: Household debt is at record levels, taxes are going up, almost 2.5 million people are out of work, and millions more have seen their hours cut and wages frozen over the past two years.
Against this backdrop, consumers are not splashing out, and instead paying off debt and saving. For individual finances, this is no bad thing, but it is not good news for the economy as consumer spending accounts for two thirds of demand.
It is called the paradox of thrift — the more people save, the less they spend, hitting demand for goods and economic growth.
Bank lending: Simon Collins, head of corporate finance at KPMG, points out: “A set of GDP figures is not going to act as a lending trigger.” But this is exactly what the economy needs if the recovery is going to be sustained. While the technical end of the recession will help underpin confidence, small businesses are still being denied the funding they need to invest, create jobs, and drive the economic recovery.
The housing market is looking far healthier than it was a year ago, but with banks still demanding 20% or 25% deposits, housebuilders are reluctant to build and first-time buyers in particular are unable to get onto the property ladder.
Government debt: The Government has ploughed billions of pounds into the economy during the recession to save jobs and support businesses but with borrowing set to hit a record £178 billion this year, the largesse is coming to an end.
Tax rises and spending cuts are on the way, whoever wins the general election. The biggest fiscal boost — the temporary VAT cut from 17.5% to 15% — has already been reversed.
David Cameron is promising an emergency budget immediately after a Conservative victory to tackle “Labour's debt crisis”. Gordon Brown wants to wait until the recovery is more secure before taking action.
Both policies have their risks. If the Tories cut spending and raise taxes too quickly, it could snuff out the recovery. If Labour wait too long, the UK faces losing its AAA credit rating, which would send the pound into freefall and inflation and interest rates soaring.
“Whatever the election result, a very large fiscal squeeze is coming,” says Jonathan Loynes of Capital Economics. “The pips are going to squeak like they have rarely squeaked before.”
The Bank of England: It is hoped that record low interest rates of 0.5% and £200 billion of newly printed money will help offset the looming tax rises and spending cuts. But the sudden rise in inflation to 2.9% last month means the Bank of England may be forced to raise rates and reverse its money-printing programme sooner than expected.
Bank Governor Mervyn King warns that inflation will rise above 3% this month but hopes it will return to the 2% target later in the year.
If it does not, the UK faces the double whammy of rising interest rates alongside the biggest fiscal squeeze for a generation.
