Rain or shine? The disputed forecast for the British economy

As conflicting signals abound, Economics Editor Sean O’Grady wonders whether the recession really is over
Click to follow
The Independent Online

Where is the economy going? It seems as difficult to predict as the weather. A few months ago, the outlook was pretty clear: down, and fast. It was not going to be barbecue weather.

The banks were bust, panicky stock markets were trading at multi-decade lows, the housing market had slumped, and the world's economies were experiencing an unprecedentedly sharp and synchronised downturn. We were well on our way to the worst slump since the 1930s.

Now things are more optimistic – and confusing. Most economists think that the British economy has already returned to some sort of growth, though you'd be forgiven for not noticing. Yesterday's rise in bankruptcies was gloomy, but goes a little against the trend of brighter news.

No one is expecting another major bank to fail, house prices appear to be stabilising, the stock market is enjoying a boomlet and businesses and consumers are starting to recover their nerve and "risk appetite".

Tax cuts, public spending boosts, loans and capital injections for the banks and so-called "quantitative easing" – the injection of huge quantities of cash directly into the economy like a sort of adrenaline shot to the heart – have all been applied to the global economy and are having an effect, though the rising tide of bankruptcies and unemployed and the overhang of consumer and government debt will stymie the recovery.

Chances are that the economy may waver between recovery and recession for some time. Whether we're technically in one category or the other will scarcely matter that much; we will feel poorer, even if we've managed to hang on to our jobs.

Breaks in the clouds

Stock Markets

The clouds have parted and stock markets have rallied since March, when a global sell-off pushed them below even the depths reached last September after the collapse of Lehmans. Much of the recovery has been driven by bank stocks, with investors impressed by the ability of the likes of Goldman Sachs and Barclays to trade their way back to profit. The rally has helped firms raise cash. But the FTSE 100 would need to jump by 50 per cent to match its year 2000 highs.


Like meteorologists, economists are constantly seeking early warning signals of weather conditions. Surveys of business confidence have been an accurate “leading indicator”, and have been edging up since spring. Even so, the fall in output across the economy of 6 per cent over this recession is the most serious decline since the 1930s. It will take years to return to for pre crunch levels. Consumer confidence and retail sales are also more resilient.


Sunny spells? Figures from Halifax, the Nationwide and the government all confirm that house prices appear to be stabilising. The Royal institution for Chartered Surveyors says that it now believes prices will end 2009 higher than they started the year. But doubts remain: a shortage of supply could be pushing them artificially higher. Mortgages are still hard to come by. Rising unemployment and interest rates next year will also dampen things.

Gale force warning

Bank lending

The banks say that people seem more interested in paying off debts and they’ll lend to credit worthy customers. Business and ministers disagree. Whoever is right, lending is evidently not sufficient to propel the economy into strong growth. Our banks are simply too weak, while the foreign banks that supplied so much credit in the boom have disappeared. It seems we can have a healthy banking sector or a healthy economy – but not both.

Public finances

A perfect storm. The Exchequer’s reliance on revenues from fat City bonuses and the booming property market means that the fall in income is even harsher than usual in a recession. Unemployment benefits are up and there is an unknowable final bill for rescuing the banks. Overall, the levels of debt run up by consumers, companies and the government, and the cost of servicing and repaying them, will create headwinds against growth for a decade or more.


The blackest cloud of all. Most economists expect it will climb beyond 3 million (one in ten) by next year, from 2.4million (7.6 per cent) now – with the number of long-term and young people unemployed as bad as in the 1980s. Economists say the unemployment figures are a “lagging indicator”, as the numbers will carry on climbing even after the economy starts to grow. Most businesses can easily increase output without hiring new staff. A squally outlook.