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
Sunday 12 February 2012
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
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.
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