So, are we on the road to recovery?

There’s so much conflicting data around that it’s hard to know if we’re about to prise ourselves out of the effects of the credit crunch or collapse into another recession. Colin Ellis, a former Bank of England economist, and our own Russell Lynch do battle over whether the UK is about to sink or swim

Yes

Colin Ellis

The UK economy is going through a sticky patch – that much is certainly true. But the various doomsayers that have already confidently proclaimed a double-dip recession are misreading the data. The bigger picture is not as bad as you might think.

The technical definition of recession is two consecutive quarters of economic shrinkage. After the 2011 fourth quarter GDP data, we are halfway there. But another decline at the start of this year is far from inevitable, despite what various people have said.

If you dig into the data, then the weakest month in Q4 was October – economic activity actually recovered in November, and expanded again in December. That means that, even if the economy just stays at December's level throughout Q1, we will see a small positive growth rate at the start of this year, and recession will be avoided. The latest indicators suggest that 2012 could even have started a bit more brightly than that. It is a bit presumptive to definitively call Q1 without even waiting to see what happens in February and March.

Even if we do see another small decline in Q1, confirming a return to recession, it is worth putting that into context. If the Q4 figure is repeated at the start of 2012, then economy will have shrunk by 0.4 per cent in six months. That is less than the 0.5 per cent drop that a week of snow caused at the end of 2010 (and we have coped much better with the snow this time around). Any double-dip, even if it does come to pass, will barely register next to the 7 per cent fall in national income that we witnessed in 2008/9. All recessions are not the same.

This time around, policymakers are alert to the risks. Chancellor Osborne responded to the weaker-than-expected recovery by giving the UK more time to put its public finances in order. And the Monetary Policy Committee (MPC) has just announced another £50bn of asset purchases, bringing the total to £325bn. The MPC may have only cut interest rates six months into recession last time around, but this time they are definitely on the ball.

In fact, monetary policy will be critical over the next couple of years. With economic rebalancing taking longer than expected, the household sector will remain a key driver of activity. And, although the labour market has softened noticeably in recent months, overall household balance sheets have held up well.

For all the talk of debt-fuelled growth, the vast majority of household liabilities are mortgages, secured against homes. House prices have fallen a bit, more than 10 per cent from their peak, but most homeowners still have their heads above water. Another sharp drop in prices could change that – but the doom-mongers predicting 40 per cent falls in house prices have been proved wrong so far. What's more, with interest payments still a fraction of income even now that the lowest fixed-rate deals have expired, most households are coping. And the MPC will not raise rates too fast.

Of course, any grounds for cautious optimism are contingent on the euro not disintegrating in spectacular fashion. But that is probably the sort of thing it would take to knock us seriously off course. Continued delay and debate, with yet more summits – as seems most likely – would be unlikely to plunge us back into deep recession.

The UK is also still a good place to do business. For all the talk, we rank consistently well on global measures such as the Heritage Foundation's economic freedom indices, or market regulation and barriers to entrepreneurship. The World Bank/IFC recently rated the UK as the seventh easiest place to do business in 2012, ahead of the likes of Korea, Sweden and Australia. The wealth of expertise we have in business services also stands us in good stead as Asia increasingly flexes its economic muscles.

The next few years are unlikely to be pretty – but nor are we set to see the doomsday scenario that some are painting. It's not as bad as all that.

Colin Ellis is the chief economist and research director at the British Private Equity & Venture Capital Association

No

Russell Lynch

It's easy to find reasons to pick on the British economy. Like the weedy kid in the playground left standing against the wall for the kick-about, the UK has been left behind by the majority of its international peers in the recovery stakes. Most are showing us a clean pair of heels except debt-laden Italy and Japan, which is still reeling from the impact of the tsunami of nearly a year ago.

The Bank of England clearly agrees, which is why it opted for another £50bn in quantitative easing last week. Yet on the face of it things are picking up – or so the bulls tell us. Inflation is coming down, which should ease pressure on household finances. The business surveys have been positive, as the Bank noted last week. Trade is picking up, offering hopes of that much vaunted, but little seen, export-led recovery. And public finances are in better shape, with the Chancellor set to undershoot his £127bn borrowing target this year. What's not to like?

Let's take these in turn. Inflation may be on the way down, but it probably won't provide the boost to the economy that everybody hopes. Looking at the inflation rate alone is deceptive, when actual prices have soared. Take energy bills: even accounting for recent cuts these have jumped more than 30 per cent since the start of the downturn in March 2008, with gas up almost 50 per cent. Another essential, food, is up 21 per cent in the same period. But the Office for National Statistics' annual survey of hours and earnings shows weekly pay up only 4 per cent in the three years to April 2011.

With such a real-term hit to disposable income, I wouldn't be putting money on a significant spending revival even when inflation comes down. Unemployment – 2.68 million and counting – will rise and that hardly suggests a wage bonanza on the way. It just means workers are getting slightly less crushed than a year ago.

Business surveys so far this year have undoubtedly been strong, particularly in the services sector. But again caution is necessary. The financial information firm Markit, which compiles the purchasing manager surveys, says much of this growth is from firms eating into their backlogs – something that can't continue indefinitely. Another reason to sweat is a sudden build-up in stockpiles among UK businesses. Sometimes this is positive but usually it is unplanned: firms have been caught off-guard by a sudden slump in demand and can't cut production quickly enough. The trend typically points to lower future production, and falling employment, as staff are cut in reaction to lower demand.

This brings us to trade figures: the Bank wants an export-led recovery and December's figures seem to be delivering it with the smallest deficit in eight years. But look closely – the improvement has been driven by a bigger collapse in imports than exports, rather than booming exports. This hardly bodes well for domestic demand.

At least the public finances aren't as bad as expected? Tax revenues have been boosted by higher VAT and the bank levy, although income tax receipts – a fairer indicator – have been far more muted. Slowing growth will eventually be felt here too, putting Osborne's fiscal targets under pressure and even forcing him into more austerity. The cuts he's already pencilled in will see falling state spending knock an unprecedented 1 per cent on average off output over each of the next five years, according to Deutsche Bank.

All this and we haven't even mentioned the eurozone. Last week's fudge on Greece may persuade you this fiasco will end happily. I'm not convinced, and the UK is in the line of fire when the crisis inevitably flares again. Be afraid.

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Luis Suarez looks towards the crowd during the 2-1 victory over England
sport
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sport
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Sport
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform