Looking for signs of where our economy is heading

Are we on the road to recovery? Or is recent growth simply a precursor to a second phase of recession?

That is the multibillion-pound question currently facing the country’s business leaders, economists, politic-ians and consumers, and it is an issue that has split opinion down the middle.

The UK officially entered recession in January 2009, following two consecutive quarters in which the economy shrank, falling 0.6pc in the third quarter of 2008 and 1.5pc in the fourth.

The first quarter of 2009 saw the steepest decline, down 2.4pc on the previous quarter, before the economy returned to growth in the last quarter of 2009, rising 0.4pc.

While the start of 2010 is expected to show continued slow growth, there are two main schools of thought on what will follow.

Analysts in one camp believe the slow growth will continue, in what economists would term a U-shaped recession, with decline followed by smaller ups and downs before a slow recovery.

But conversely the double-dip camp see the recent growth in GDP as a false recovery, warning another downward leg is set to start in a W-shaped recession, character-ised by a steep drop, short period of apparent recovery, and a second drop.

Subscribers to both camps may claim history is on their side.

The recession of the mid 1970s, sparked by the 1973 oil crisis, followed a U pattern, with a long period of recession followed by a slow recession.

But the 1980s US recession is held as an example of a W-shaped downturn, with two periods of downturn separated by one of growth.

While the downturn officially ended in late 2009, many challenges remain, fuelling the fears of double-dippers.

Growth has been slow, recent troubles in the eurozone could impact on UK companies and the new coalition government faces tough choices to tackle the public deficit – choices which some fear could jeopardise the recovery.

Andrew McTear, partner at regional insolvency and business rescue specialists McTear Williams & Wood, said he believed there would be a second downward leg in the recession as businesses continue to adjust their debts following the financial crisis.

He said: “The politically correct view is let’s hope for the best, and I guess I do that too.

“But I’m in the double-dip camp. The reasons for that are that the boom in the mid 1990s and most of the 2000s was extremely strong and worldwide, and both were largely built on a huge credit bubble.

“In the Western economy, which funded all of that growth, there have been huge amounts of consumer debt and business debt, although to a lesser degree than in some previous cycles.

“There has been significant expansion in financial sector debt and a huge explosion in government debt.

“That has led to huge overall credit bubble, and the de-leveraging which is going on now is likely to continue for some time. That’s going to create strong headwinds for the economy, leading to a double-dip.”

As well as the challenging conditions, Mr McTear said an unknown event was likely to act as a spark, leading to another period of downturn.

“There could be a second banking crisis, or a second leg down in property prices,” he added.

“We don’t know what it will be but something is likely to trigger another downturn, which will cause other problems like a house of cards.”

But while some analysts warn government actions, such as spending cuts, will precipitate a second dip, Mr McTear said the trigger was likely to be something more “dramatic”, and said government actions were only likely to postpone rather than prevent another downturn.

He said in history W-shaped recessions were “much more normal” than U or V-shaped ones (which involve steep falls followed by steep recovery), and said recessions usually saw prices of assets such as housing fall to “below long-term averages”, which he said hadn’t happened so far.

He added: “In this particular recession we haven’t reached those levels. It would be unusual to draw that line and have a firm base for a sustainable recovery with asset prices not having dipped to long-term averages. Prices are still high in relative terms.”

But he said once lower levels were reached it would provide a “firm base” from which the country would move into strong growth again, adding: “I believe there will be a double-dip but I’m not saying we are going to the dogs forever.”

While risks remain, however, many predictions support a continued – but slow – recovery.

Business organisations CBI and the British Chambers of Commerce both say recent improvements are likely to continue, with the latter predicting 2pc growth in the 2010/11 year.

But both warn the economy is not on safe ground yet.

Caroline Williams, chief executive of the Norfolk Chamber of Commerce, said: “A double-dip recession is unlikely as the UK’s recovery is now under way – we have now seen two quarters of economic growth, after all.

“However, there are still very real risks out there, and if they are not properly addressed by government, they will put a UK double-dip recession back on the agenda.

She said deficit reduction was now a priority for the new government to restore confidence in the economy, and help the Bank of England keep interest rates low, driving consumer demand and business investment.

But she said with pressures on the eurozone – which buys 50pc of UK exports – it was impossible to rule out the possibility of a double-dip, adding: “Clearly, we are in very fragile economic times and we’re not 100pc out of the woods yet.”

Amanda Sturgeon, assistant regional director at CBI East of England, said the group expected economic recovery to be “slow and sluggish” in 2010, “with few signs of real strength until well into next year”.

She said the euro crisis posed a risk to recovery, but added: “Given the significant uncertainty in the economic outlook, the risk of a double-dip cannot be totally ruled out, but the UK economy looks to be on track to maintaining the gradual recovery that we have seen in train since late last year.

“Dwindling rates of destocking are helping to provide a short-term boost to UK growth, and with business investment starting to rise again, there are more signs that the private sector is slowly recovering.

“UK household spending is on a path of recovery, but one that is tempered by the renewed squeeze to real incomes from higher consumer prices and still-muted pay growth. We continue to expect only a modest rise in consumer spending this year.”

Eastern Daily Press
2 June 2010

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