Thursday, November 12, 2009

The Long Slow Climb Back to Recovery

At one stage, it looked as if official unemployment statistics could rise close to 3 million. So yesterday's unemployment figure of 2.641 million suggests the worst may be over. There was a small monthly fall in unemployment. This meant a 3 month rise of just 8,000 - the smallest increase since the recession began. It is encouraging because unemployment is often a lagging indicator - which means that usually unemployment continues to rise even during recovery. A fall in unemployment at this stage is very welcome.

Combined with improving consumer confidence and growing manufacturing output, it gives more credence that last months GDP statistics were wrong and underestimated GDP

In fact many traders and economists are convinced the recession is over and GDP statistics are misplaced

Chris Williamson, the chief economist at Markit, which produced several surveys showing positive economic signs, insisted that the ONS data was wrong. He said: “We think the numbers are wrong. A whole host of indicators other than ours show that the economy grew in the third quarter, powered by a stronger services sector. There is a risk that these figures could lead to disastrous policy mistakes. The ONS has always found measuring the services sector difficult.”

However, as Governor of Bank of England suggests, even a modest recovery is no cause for '"bunting and celebration". Output is still 6% below 2008 peak. Firms and consumers will be engaging in a balance sheet recovery. In other words, we are still trying to repair our past debts hampering spending and investment.

Also, one of the fundamental causes of the recession - the credit crunch - is still hampering business and firms. Banks are still reluctant / unable to lend and are relying on intervention by Bank of England.

1 comment:

Anonymous said...

There is not going to be a slow road to recovery. We are going to experience a worsening situation.

Once the VAT and Stamp Duty holidays come off inflation will rise. Increasing oil prices will again lead to higher product and service prices pushing inflation even higher.

When we consider the effects of the Bank of England printing money and keeping interest rates at low levels inflation is likely to spike.

Firstly, this inflation will weaken the pound. It will also destroy the value of savings but this isn't proven to encourage spending, it will typically lead to money being invested in the long run or outside of the UK. So those with savings will likely cut their spending even more than they currently are.

To pay for all the stimulus the Government will have to cut spending in other areas. Many jobs from the civil service will go. This will result in even less consumer spending with an ever increasing burden on welfare.

Tax rises to cover this will lead to some tax avoidance and low earners going back to welfare because they are punished for working.

While these falls will combat inflation they won't reduce total Government expenditure. The Bank of England will be forced to raise interest rates dampening the economy even further but necessary to combat hyper inflation.

This whole 'credit crunch', such an inappropriate description, has not cause a recession, it's merely a correction. It's a correction of overvalued loans that were freely given and traded in the financial sector. It's got to hurt but it's going to happen. All our stimulus measures only treat the symptoms, not the cause.

Even Adam Smith didn't trust the reliability of the financial system. Keynes thought that de-regulation of the markets was dangerous and it has been proven yet again. We're deciding pretending to follow their 'wisdom' now, shame we couldn't do it when we were fixated on profit.