Deeper, longer recession raises fears for the recovery

Author: By Sean O’Grady, Economics Editor

Between January and March the economy shrank by 2.4 per cent rather than the previously thought 1.9 per cent. Those 12 weeks thus witnessed a more severe contraction than occurred in the whole of the recession of the early 1990s.

Given the other downward revisions by the official statisticians, the scale of the present recession can now be viewed in its full historic majesty ? the biggest since the early 1930s in terms of the fall in output from peak to trough. At 4.9 per cent it comfortably beats comparable figures for the slumps of the 1970s, early 1980s and early 1990s ? at 3.5 per cent, 4.6 per cent and 2.5 per cent respectively.

Around half of the ONS’s downward revisions for GDP in the first quarter of 2009 were accounted for by the construction industry. Although only around 6 per cent of the economy, such has been the biblical catastrophe that has overtaken the building and construction firms that they have managed to drag the economy down with them, and by more than City analysts anticipated. General business profitability and investment are also being squeezed.

The focus for policymakers will be less on history, however, and more on what the data tells them about the chances of a sustained recovery. The Bank of England, which must decide soon whether it will end or extend its £125bn programme of quantitative easing, so-called printing money, will take the reports as evidence of an even higher level of excess capacity in the economy, and strengthen the general view that many of the underlying forces in the economy are deflationary ? meaning that it could keep monetary policy easy for longer.

Much of the fall in output over the past few months has been attributed to the “inventory recession”, but the latest figures hint that the ongoing constriction of bank lending in the economy will continue to make its presence felt even after the “destocking” phase has ended and the economy enjoys a temporary bounce as car production and other output resumes.

Consumer spending will also be restrained by a rise in savings visible in the data, as nervous households eye the jobless numbers and try to pay down debts accumulated during the boom years. On one measure, savings are at a three-decade high. Figures also released by the ONS show that the current account deficit, at £8.5bn in the first quarter, is showing only modest improvements, and the much-awaited boost to the economy from a much-depreciated pound is yet to arrive.

Economists’ opinions are starting to diverge more sharply on the shape of recovery, and on future house prices, interest rates and inflation. The Nationwide reported a 0.9 per cent rise in house prices during June, taking the annual rate of decline to 9.3 per cent, gentler than in recent months. While such news is taken as a sign of imminent recovery in the property market by some economists, others dismiss the figures as a symptom merely of pent-up demand from cash buyers being released.

Think of a letter: The recession shapes the experts forecast

Simon Hayes, Barclays: W

We will probably see some sort of “bounce” in the second quarter but the underlying constraint remains the credit crunch. Sluggish consumer spending and weak business investment will eventually reach a floor and the economy will return to growth ? though it may be very slow.

Howard Archer, IHS Global Insight: L

Businesses’ investment intentions are exceptionally subdued, reflecting deep uncertainties about the future and increased spare capacity. Meanwhile, consumers are under pressure from higher and still rising unemployment, low wage growth and heightened debt levels. Furthermore, demand from key overseas markets remains muted, thereby limiting the beneficial impact of the more competitive pound.

David Page, Investec: U

The economy should resume expansion in the third quarter. As we enter next year we hope to see genuine signs of improvement in consumer activity and business investment that will mark the start of a more genuine period of recovery and avoid a “double dip”. Nevertheless, it faces significant headwinds.

Sean O’Grady on economics at

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