Which way do the main economic indicators point?

Sean O'Grady crunches the numbers to ascertain whether the worst of the recession is over – or still to come
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The Independent Online


The Bank of England is predicting a relatively strong recovery, though less robust than previously thought. Most other forecasters including the Office for Budget Responsibility and the IMF are less optimistic, and they put the chances of a "double dip" at around one in five.

Vince Cable, the Business Secretary, thinks the chances are "less than 50/50", even less reassuring. Whoever is right, the big picture is that the peak 2008 levels of activity probably won't be seen before 2012.

Longer-term, the Bank of England is also hinting that a reduction in business investment, which fell by more than a third in the downturn, could lead to a permanent reduction in the country's ability to grow.

Less spending on new capital plant and machinery, new computers and software and new methods of working threatens the usual growth in productivity that naturally comes with such changes, and, in turn, means firms will grow more slowly and generate fewer jobs and lower pay rises for many years to come.

Even as things stand, output is about 10 per cent lower than where it "ought" to have been if we hadn't suffered such a deep recession – about £150bn in lost output, resources that could have been used for all sorts of wonderful projects.

If growth does stumble, then the "automatic stabilisers" will kick in: tax revenues will fall, government spending will rise and the Government's chances of hitting its headline borrowing targets will be damaged.

Bank lending

For whatever reasons, and whoever is to blame, the statistics show that bank lending to small businesses has declined and is still falling. Task forces and ministers fret, but the main fundamental factors behind the fall seem certain to persist. Firstly, the banks desperately need to repair their balance sheets, and that means restricting lending to only the best prospects, and that usually doesn't include smaller firms.

Large companies have been able to bypass the banks and issue new shares and bonds direct in the capital markets, options not available to the average small retailer or self-employed tradespeople. Secondly, the contraction in sales and orders makes it comparatively unattractive for firms to borrow to invest in any case. Indeed, this is one of the big potential difficulties in leaving the running of the economy to the Bank of England and monetary policy.

For it doesn't matter how cheap the loans may be – even if they were freely available – if a business cannot see a profitable use for the capital. That's the problem that Keynes famously called "pushing on a string" – that no matter how cheap you make money you may still be unable to persuade consumers and firms to borrow and spend as they would in a boom. Confidence seems in shorter supply these days.


One of the more pleasant surprises in this recession has been the way that the rise in unemployment, though severe, has been much less than might have been expected by the contraction in the economy and the fall in GDP. This is usually put down to widespread wage restraint, including many pay freezes; "hoarding" by employers keen to retain skilled staff; a more flexible labour scene seeing people into more part-time, temporary and casual work; and the success of government welfare-to-work schemes.

However, a second downturn, even if not as bad as the 2008-09 one, would also mean more job losses, and the Chancellor is planning a total loss of 600,000 jobs in the public sector by 2015. Even if the private sector could take up all the slack, there would still be a mismatch between new jobs in, say, Cambridge or Guildford, and the jobless in Coventry or Newcastle.

The new ex-public sector unemployed may lack the skills to take up new private sector jobs as the economy "rebalances", and, even if they did, the distortions in the housing market mean it is difficult for many to move home. A scarcity of staff in the south could easily coexist with mass unemployment tin the north, and on an even more acute scale than in the 1980s.


A temporary shortage of housing stock last year created a mini-boom in prices which now seems to have played out. Lower interest rates set by the Bank of England also helped, though these have been only partly reflected in actual deals available from lenders.

Now fears for the future by would-be buyers and continuing reluctance from the banks to lend to first-time buyers is suppressing the demand for housing, while the supply of homes is accelerating.

One powerful factor which has boosted the supply of homes to the market is the abolition of HIPS. The coalition Government probably didn't design the policy with the aim of pushing house prices down, but that is what most people in the property market believe has happened.

Longer-term, the forbearance shown by many lenders to householders in difficulties – partly motivated by a resistance to crystallise losses on the balance sheet – may also not last for much longer.

The last recession, in the early 1990s, which was characterised by an epidemic of negative equity and a spiral of forced sale repossessions, pushed prices lower still and added another twist to a classic deflationary cycle.

That has been mercifully absent this time round, and lower interest rates mean that mortgages bills have stayed affordable.

Accountants, PricewaterhouseCoopers warn that mortgage interest rate rises back at 2008 levels would put a £1,800 average annual squeeze on spending power of 10 million British households with mortgages.


In 2008 a commodities boom similar to the one now playing out across global markets pushed inflation beyond 5 per cent. The pressures on family budgets could be just as severe over the next 12 months. The Russian drought and other freakish weather conditions have driven world grain prices sharply higher, along with other foodstuffs such as tea, coffee and orange juice, and industrial commodities such as oil and copper. Oil is still some way off its 2008 peak of $147 a barrel, but the pressure on the price of everything from beer and bread to Korean TVs and German cars will soon be felt. The most often purchased items – bread, petrol, public transport fares – will go up most, meaning that inflation will feel worse than it actually is, and that might fuel pressure on wages.

The hike in VAT to 20 per cent in January and the after-effects of the depreciation of sterling since 2007 will also fuel inflation. After 15 years when price rises hardly strayed from the official target, the convulsions in the world economy have seen it more volatile than at any stage since the 1980s; a sharp spike in 2011 and a possible collapse to well below 2 per cent in 2012 promise more time on the roller-coaster.