Jeremy Warner: Best not to count on those green shoots
The case for a double-dip recession is all too easy to make
Tuesday 09 June 2009
So the recession is over, and Alistair Darling, whose Budget forecasts for the economy were ridiculed as optimistic to the point of delusion, may even turn out to have been too pessimistic.
So says the Organisation for Economic Co-operation and Development (OECD). OK, so perhaps not quite, but there is a growing consensus in the City that the economy has stopped contracting, and the OECD reports that a "possible trough" has been reached in its analysis of forward-looking indicators for Britain and other advanced economies.
Regrettably, this may not actually mean very much. The extremes of the economic contraction shown in the last two quarters were caused largely by a violent inventory adjustment, as across the supply chain businesses cut stocks to counter shrinking credit and a plunge in demand. Once that process came to an end, it was bound to cause some kind of a pick-up in economic activity. Yet it is no guarantee of a durable recovery. With unemployment forecast to continue growing sharply for at least the next year, it won't in any case feel like a recovery to many.
What's more, this may be a case only of pain delayed, rather than cured altogether. Much of the private debt overhang created by the credit boom remains in place. The workout has only just begun. To this must now be added a mountain of public debt, which will require perhaps years of austerity to pay off. It is hard to imagine a sustained recovery taking hold against the backdrop of the rising taxes and public spending cuts necessary to address this deficit.
The rest of the public policy response – exceptionally loose monetary conditions – will also have to be reversed at some stage. Higher mortgage rates will further squeeze disposable incomes. As can be seen, the case for a double-dip recession, or W-shaped recovery, where the economy grows a bit before sinking back again, is all too easy to make. The present crop of green shoots offers no more than a glimmer of hope to the beleaguered Prime Minister, even if he can hang on for the next year.
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