Analysts: The recession has ended
Economy has stopped shrinking, says leading group of analysts
Thursday, 11 June 2009
The recession is over, according to one of the nation's most respected economic think-tanks.
The UK's surprising resilience is confirmed by the National Institute of Economic and Social Research (NIESR), an independent body with an enviable record for accuracy. It says that the economy hit rock bottom in as early as March and returned to growth, albeit modestly, in April and May.
The institute says that the economy grew by about 0.2 per cent in April and by 0.1 per cent last month. Although hardly a return to the boom conditions that prevailed before the credit crunch, these figures mark the end of more than a year of stagnation and recession, and stand in stark contrast to the grimmest predictions of a 1930s-style slump. Ray Barrell, director of forecasting at the institute, said that "the evidence from the last few months is that we may well have reached the bottom of the depression".
The Bank of England's radical cuts in interest rates and its programme of "quantitative easing" – injecting cash directly into the economy – were singled out by the NIESR as major reasons for the turnaround. According to the institute, if the recovery is sustained then the current downturn will have been less severe than those of the 1930s and the 1980s, although still more grievous than the one the economy went through in the early 1990s.
If the economy has indeed returned to growth when the official figures for the second quarter of this year are announced next month, then the Chancellor's forecast in his Budget in April that the UK would return to growth by the end of the year will have been delivered spectacularly early. What is more, the UK will also be one of the first major European economies to emerge from the downturn. It will be a much-needed boost to a Government that has seen its reputation for economic competence shredded during the credit crunch. A Downing Street spokesman said: "There are signs that the Government's actions to support the economy through this difficult downturn are having an effect but there are absolutely no grounds for complacency."
Surveys of business confidence also suggest that the economy will soon return to modest growth. "The... figures generally bode well for a recovery and it's feasible that GDP will have posted a gain over the second quarter," said Philip Shaw, UK economist at Investec.
Alan Clarke, an analyst with BNP Paribas, agreed. "We are accumulating more and more evidence that the recession is over. To be clear, we are not heading for a boom. The economy is still likely to grow much slower than potential, in turn meaning that unemployment will continue to rise. But the point is that the economy is no longer shrinking."
Having endured a year where output fell by a fifth – and by up to a half in particularly hard-hit sectors such as car-making – it is manufacturing that seems to be securing a period of stability.
The Office for National Statistics said yesterday that manufacturing output rose last month for the second time, a much better result than economists had been expecting. The monthly rise in each of March and April was 0.2 per cent, above forecasts. Car production is up 8.5 per cent, and pharmaceuticals up 5.5 per cent. An increase in North Sea oil production pushed overall industrial production higher still. The latest trade figures showed deterioration but even there the trend is encouraging, with exports improving faster than imports, a reflection of the stabilisation of world trade and the weakness of the pound.
Much of the improvement, says the NIESR, is simply due to the fact that retailers and other businesses have stopped "destocking", where they sell or produce from existing inventories rather than ordering in new supplies. But the NIESR also suggests that the cost of borrowing money has been falling sharply in recent weeks. This, says Mr Barrell, is a direct result of the Bank of England's successful programme of "quantitative easing" – designed to boost demand and, eventually, push inflation back up to the official target of 2 per cent (prices are due to fall later this year).
Some £125bn has been or will be soon spent by the Bank on buying government securities and pushing cash into the financial system. Mr Barrell suggested that the policy had worked so well that the Bank's Monetary Policy Committee might wish to put the policy on hold. The Government's public spending increases and tax cuts had had a less dramatic effect, he added.
There has also been evidence in recent weeks that some stabilisation in the housing market may be seen over the next few months, with both the Nationwide and Halifax reporting a jump of about 2 per cent in property values last month. While such figures are usually erratic, a gradual return of buyer confidence can be glimpsed in improving figures for new buyer enquiries at estate agents and a small upturn in the number of new mortgage approvals, although these remain far below normal levels, and first-time buyers are typically being asked to find a 25 per cent deposit. The credit crisis seems to have moderated more for companies than it has for individuals.
Doubts remain in some official quarters as to the strength and sustainability of the recovery. In remarks to the Leicester Mercury during a visit to the Midlands, Kate Barker, a Bank of England policy-maker, commented that "manufacturing orders are starting to come back, but whether that's a stocking issue or a turn-up in final demand isn't so clear... The really important question is whether there's a pick-up in the economy and if people can sustain that so it continues on to autumn."
Hers are the latest in a series of cautious remarks from Bank figures over the past few weeks. "Our present view is that we think [interest] rates could stay low for quite some time," she added.
So is the recession over? View from the frontline
Theo Paphitis, owner of Ryman and star of the Dragons' Den series: "I don't think we are anywhere near the end of the recession. We have probably had a bit of growth but this will definitely be a W-shaped recession. We have got a lame duck Government."
Sir Martin Sorrell, founder of the advertising agency WPP: "We hadn't noticed. The second half looks a little better than last year but that's because the comparative period was so weak. If you're asking have we seen a significant change in economic conditions, [then] no, we haven't."
Sir Philip Green, retail billionaire: "Businesses are not being funded properly. Unless the banking sector starts doing business we are going to continue bumping along where we are."
Lloyd Blankfein, chief executive officer of Goldman Sachs: "I think it's going to be a long protracted [global] recession. There is no reason to think this is it... So many things have to be sorted out. Why would this be the recovery? The chances are it's not."
Jeremy Warner: Recession may be over but not the pain
Thursday, 11 June 2009
Outlook All of a sudden, the green shoots of economic spring seem all around us. Some of them may even be turning into smallish shrubs, if not quite yet fully grown bushes. According to estimates published last night by the National Institute of Economic and Social Research, which is second to none in the accuracy of its forecasts for the UK economy, March marked the trough of the recession, with the economy actually growing in April and May.
If these estimates are right, then the second quarter will have been one of positive growth, albeit not by much and following one of the most violent contractions ever recorded for the preceding three quarters. Only the Great Depression has witnessed a more precipitous lurch into the abyss.
Still, let's not be churlish. If this is indeed the trough, the scale of the contraction will have been smaller than that of the recession of the early 1980s. Somewhat unbelievably, given the near death experience of the banking system, this won't have been the worst economic contraction since the Second World War.
In any case, the recession seems to be over for now and Alistair Darling's Budget forecast that the economy would be growing by the end of the year, widely condemned as delusional at the time it was made, looks as if it will turn out to be correct.
Incumbent governments will always attempt to harmonise the economic cycle with the electoral one in the belief, possibly misguided, that if voters think things are getting better, then they are more likely to opt for the status quo.
The evidence for this is actually fairly patchy, and certainly the correlation works much better in the US than it does here. John Major managed to win an election in the depths of a recession but then lost the next one even though the economic recovery was by then well established.
Yet famously in the US, James Carville, Bill Clinton's campaign strategist in the run up to the 1992 presidential election, hung a sign in the presidential hopeful's Little Rock campaign headquarters that read "it's the economy stupid". This was meant as a reminder to his candidate that despite the achievements of the incumbent, President George Bush senior, in presiding over the end of the Cold War and apparent victory in the Gulf, the economy was a clear Achilles heal.
Bush senior later roundly blamed Alan Greenspan, then chairman of the US Federal Reserve, for scuppering his chances of a second term by not cutting interest rates sharply enough ahead of the election.
It was a mistake that his son, George W, did not intend to repeat. The US economy was shamelessly pump primed ahead of the 2004 election and George W staggered back into power despite the by then already manifest mistake of the Iraq invasion.
So is it remotely possible that Gordon Brown, universally declared electorally dead and buried as recently as a few days ago, has pulled off the trick of fine-tuning the economic recovery to coincide with going to the polls? Politics is an unpredictable old business, and certainly our beleaguered PM must be feeling a bit happier with life this morning than he was in the immediate aftermath of the European elections.
This in any case wasn't as bad a result for Labour as generally thought, as it failed to give the Opposition the overwhelming vote needed to be sure of a big majority in a general election. Rather, support frittered away to the fringe parties. The attempted putsch has been seen off and now the economy is improving. This must give the PM renewed hope that he can still win a general election, however unrealistic it might be.
No wonder that senior Tories sometimes refer to him as "Terminator". It seems impossible entirely to kill him off. Battered and bruised, minus a couple of limbs and stripped down to his metallic innards, the red eyes still stare out, even as he is lowered on a chain into a vat of boiling lead.
Yet even one as willing to clutch at straws as Mr Brown cannot be counting on the economy to bail him out. People's memory of a downturn is long, and voters don't quickly forgive. Nobody believes Mr Brown's insistence that this was an economic calamity which sprung entirely from the excesses of the American housing market, with the UK caught up in it all as some kind of innocent bystander. Still less are they inclined to give him credit for the policy response, which rightly or wrongly is quite widely regarded as chaotic, dithering and inept. In any case, it is the crisis, not the crisis management that people tend to remember.
But the more serious fly in the ointment is that to the extent that there is an economic recovery going on, it rests on extremely shaky foundations and may not last very long. Sir Martin Sorrell, chief executive of the advertising giant WPP, says bluntly that he's observed no recovery at all. It's not hard to see why to many recovery looks like a mirage.
The main reason why the economy has stopped contracting is that business has stopped de-stocking. In the first quarter alone, British businesses cut their stocks by some £6bn. Such a fierce inventory adjustment cannot go on indefinitely.
If the destocking sinks to zero, as it might have done for the second quarter, then that in itself will cause production and activity to rebound quite sharply as a more normal pattern of orders and supply re-establishes itself. The pickup in industrial production reported yesterday seems to confirm this analysis.
Yet if consumption and investment continue to decline, the inventory effect may turn out to be no more than a one-off boost. Unless business starts actively to restore stocks to pre-bust levels, as opposed to simply not cutting stocks any further, eventually these more negative forces will reassert themselves and the economy will begin contracting again.
That's why everyone is still so cautious about calling the end of the downturn. Any recovery that is taking place is still a long way from being self sustaining.
A number of City economists reckon that consumption is about to pick up too. Certainly the rise in disposable incomes caused by rock bottom mortgage rates gives good reason to think it might do. Unfortunately, any such revival is the very reverse of what's necessary to deal with the structural problem at the heart of the UK economy.
Over the last 20 years, the UK has had the lowest savings rate of any OECD nation, knocking even the US into second place. In this "spend now, worry about the consequences later" world, Britain's economy prosperity has come to rely disproportionately on consumption and the boom in house prices. Investment in the future has gone by the wayside, which for an ageing society creates a potentially devastating deficit for the future.
The savings deficit is one thing; alongside it runs a now burgeoning fiscal deficit which also has to be addressed urgently. The renewed row that broke out in Parliament yesterday about who is going to cut how much out of which departmental budget is all so much political noise.
The only thing we know for sure is that whoever occupies Number 10 after the next election is going to have to make deep cuts across the board. Even the marginal increases pencilled in by Labour in nominal terms will mean real cuts once inflation is taken into account. That too is hardly conducive to a robust, long term economic recovery. Neither of the two main political parties yet seem prepared to admit the scale of the challenge faced.
Green shoots or none, it's an austere future that beckons.
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