The thaw may have begun….

By | January 25, 2010

…..but we are still in deep winter.

money-1900Data out tomorrow (Tuesday 26 January 2010) is likely to show that the UK has finally emerged from recession. However, the economy is so battered and bruised that any return to normality is a long way off.

The Office for National Statistics will release its estimate for economic growth in Q4 2009 on Tuesday. A set of strong retail Christmas trading figures, falling unemployment, rising inflation and some improvement in corporate investment have all recently hit the headlines.

All as lead indicators are driving the presumption that the UK economy has finally grown for the first time in almost two years.

If the news is positive, then we can factor in an additional couple of points of growth in GDP. This is because the ONS is known for its conservative first release estimates and generally revises its measure of growth up in the following months as more data becomes available.

Any sign of growth and an exit from recovery will be a welcome boost to confidence. Firms may feel more able to expand employment and households may feel comforted enough to splash some cash.

However, exit from recession should not be a champagne moment. While the thaw may have begun, we are still in deep winter. Examine the chart below from the Bank of England’s most recent inflation report. If we take current levels of GDP and track back using the red dotted line, then we last saw current levels of GDP in 2005. The recession has destroyed five years of economic growth! Such a battering has huge implications for company profits, wages and households’ ability to service debt and spend.

Some bounce back in GDP might be quite rapid. Exporters are reporting year on year growth, mostly stemming from the fall in sterling and the rapid growth in emerging economies. Other companies are beginning to expand spending and rebuild stocks. But if we track forward from the peak of the economy in 2007, the blue dotted line shows us that it will be well into 2011 before we see similar levels of GDP. A timeline which suggests a loss of 4 years of growth.

So if you are happy to hear that the recession is over, great. But don’t be planning for an economic version of a barbeque summer.


About Damian Ward

Damian studied at the Manchester School of Management before beginning his academic career at Bradford, where he now teaches business economics to postgraduate MBA students. His research interests focus on the financial services sector and he has acted as an advisor to the UK Financial Services Authority. Damian is also the author of the leading textbook, Economics for Business.

Specialties: Business economics, Financial services, Efficiency of the UK mortgage market, Economic predictions

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