Jeremy Warner: Snow and ice lies round about, deep and crisp and even

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The Independent Online

Outlook If you think the last three months were bad, just wait for the next three. Everyone I speak to in business and banking anticipates an appalling start to next year, with consumer spending expected to plunge into the abyss and mass lay-offs across the economy.

Unemployment peaked at around 3 million during the last recession of the early 1990s. Most now think it will exceed that level by the latter half of 2010. Just to put that in context, yesterday's unemployment numbers, though sharply higher, are still below 2 million in total. That makes an awfully long way to go before we reach the point of maximum pain.

Employment is a classic "lag" indicator in that it can sometimes continue rising right into the early stages of the downturn. Likewise, unemployment will still be rising even as the economy starts to recover towards the end of next year or early 2010.

Things seem so dire partly because of the speed of the downturn, which has been phenomenal. The economy contracted sharply in the third quarter, but it wasn't until mid-September that economic confidence had its collective cardiac arrest. When things are as gloomy as they are now, it seems as if a nuclear winter has settled on the economy from which there can be no escape.

Yet despite the warnings of a 1930s depression, or Japanese-style deflation, the most plausible prognosis is still that the economy will eventually recovery. It will take time, but the awesome size of the policy response, with interest rates approaching zero and the authorities chucking money at the problem as if it grew on trees, ought eventually to work. Indeed, a real possibility is that three or four years from now it will be judged to have worked a little too well, and that in defeating deflation, the authorities will only have stoked another inflationary boom.

First out of the hatches in such circumstances will be oil and commodity prices, which will come storming back as if attached to a piece of elastic. So much capacity is now being cut that when demand picks up there will be one gigantic squeeze on supply.

Still, that's not a problem we need to be worrying about right now. For the time being, we are on the freefall part of the roller-coaster and a pretty sustained plunge it looks like being too.

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