Adrian Hamilton: Sorry, but the recession is not over

The factors behind the recovery up until now have been largely temporary in nature
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The Independent Online

The recession is over. We have been told so by the National Institute of Economic and Social Research, the Recruitment and Employment Confederation and a succession of bank economists. Only it doesn't feel that way to most people in the country, suffering from cost cutting in their jobs and uncertainty in their outlook.

That is the problem with economists. "Making a speech on economics," President Lyndon Johnson once remarked, "is a lot like pissing down your leg. It seems hot to you, but it never does to anyone else."

In economic terms we may indeed be emerging from the downturn. Strictly speaking a recession is when you have several successive months of contraction. Recovery is when you record an increase, however small. Most economists – although not all (the IMF remains more gloomy) would say that this is now occurring at last in the UK, somewhat behind most of the rest of the world, and that the third quarter of the year should show some sort of rise.

Following on from that, there is the whole argument over whether the recovery is real or illusory, whether it is v-shaped or "double-bottomed" and whether unemployment will get better or lag behind.

If all that feels somewhat unreal to the average citizen, so it should. It is unreal. Economics may give you a statistical picture of what broadly is happening to output and activity in an economy. What it doesn't tell you is how it feels to experience a massive jolt like the credit crunch and how that affects spending, saving and confidence – the factors necessary for self-sustaining recovery.

The public in this case have good cause to sense two things about the economy at the moment. One is that the worst of what had been predicted has not happened. The second is that the recovery is still very far from being certain.

The banks have been saved and are doing reasonably well again (rather too well in the eyes of those who would have wished them to suffer more). Output has dropped, unemployment has risen. But the fall in interest rates has made borrowers considerably better off than they were a year ago. Consumption has held up to a surprising degree. Stock markets have risen by record amounts.

But for the recession to be over for ordinary people would mean that they feel secure in their job, expect an increase in their wage, believe that the cost of mortgages will remain low and that they can save safely for their retirement. They can, if politicians were honest, be confident of none of these.

The factors behind the recovery so far have been largely temporary in nature. Most businesses met the first signs of the downturn by reducing stocks as rapidly as possible. In recent months they have had to restock as the warehouses emptied. But at some point that will stop unless demand really races forward, which it isn't.

The rise in car sales has been boosted by the scrappage scheme, due to end next March. Consumption has been helped by a drop in the VAT rate planned to cease at the end of the year. Interest rates have been held low by a massive injection of public funds into the banks and a printing of money that cannot go on forever.

The stock market rise has been fuelled by investors seeking quick returns amongst distressed priced shares, not in the expectation of higher returns from companies. Exports have been helped by a rise in the Chinese economy almost entirely fed by state spending which is now being reined in.

Confidence, of course, can lead to its own virtuous circle of rising demand feeding back into the economy with renewed investment and recruitment. But, so far, that is not happening. Governments may huff and puff about the failure of the banks to lend to business but the banks face the same problems as their corporate customers – where is sustained demand going to come from?

It's all very well boosting car sales with scrappage, but over the future will people buy as many cars as now and what kind of cars? Will people eat out and travel as much given rising prices? So much of investment in the past decade was driven by the sense of ever increasing demand that its sudden halt has led not just to a feeling of a pause but a sense of fundamental reconsideration of where growth will, and should, come from over the future.

Without that certainty, private investment remains unforthcoming. What investment there is almost entirely fed by public expenditure, the very area which all parties now seem to be agreed will have to be cut if government debt is to be reduced.

To economists this raises the heated question of whether and when to take the foot off the inflationary brake. If the recession really is over, you should be taking the foot off the accelerator for fear of stoking inflation (not a great threat at the moment, it should be said). If growth is still fragile, then you need to keep the foot down.

To politicians – at least in this country – the debate has come to be all about how far you can and should cut back public expenditure. For the opposition, the problem is to appear tough whilst not looking callous should the recession not be over. For the Government, there is a quandary. If the economy is recovering, then action to pull down the debt is all the more pressing but if the recession isn't over then they will be held responsible for that.

It's a peculiarly barren argument. Even if the case for continued reflation were overwhelming, the reality is that the Government cannot keep spending without hitting a ceiling of what outside investors are willing to fund. And that point, in the case of Britain, appears to have been reached. But equally well, cuts in public spending will only serve to deepen the recession, and the hole in the Government's finances, should the recovery not continue.

What is needed is clear but politically difficult. It is for the Government, and opposition parties, to set out the alternative scenarios about the recovery, a plan to help revive private sector investment and an "exit strategy" for restoring the public finances in a way that will convince the markets. It won't make for comfortable reading but at least it will chime in with what the public senses to be the case. The downturn may be easing but the recession isn't over, not in the terms they understand it.

a.hamilton@independent.co.uk

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