Many economists predict a sluggish recovery with the chance of the economy stagnating or growing very slowly over next 12 - 18 months. This will be bad news for unemployment and the government desperate for improved tax receipts.
Factors Which Make Recovery DifficultRates can Only Rise. The number of mortgage defaults has been less than predicted. This is because many are surviving due to the exceptionally low interest rates. As the economy recovers and interest rates rise, many homeowners may struggle to survive. It is the same for people with other types of personal debt. Any rise in interest rates will hamper economic growth.
Taxes will rise. The government is reluctant to maintain a large budget deficit of over 10% of GDP in the medium term. Several tax cuts are scheduled to expire - leading to effective tax rises. (e.g. VAT cut to 15% will expire in Jan 09) As the economy recovers, market appetite for government debt will reduce meaning governments will need to tackle the structural deficit through higher taxes and / or lower government spending.
Banks still reluctant to lend. Despite quantitative easing and low interest rates, banks are still being cautious about lending.
Unemployment will persist for many months to come. Even if we experience small positive economic growth, this is unlikely to dent the rise in unemployment as spare capacity continues to exist. High unemployment will depress spending by both the unemployed and those who fear unemployment.
New Era of Frugality. After the unprecedented damage of the recent recession, consumers are likely to be more cautious about spending. This will be good in that we may finally try to deal with our personal debt and saving rates will rise. But, it means consumer spending will be depressed and growth lower. The level of personal debt is greater than GDP, so the debt burden will remain a significant factor depressing spending in the future. See: New era of frugality
Global Growth. The level of global growth may play a key role in picking countries out of recession. So far China and India have performed well, providing growth in demand for exports, but, the Chinese economy shows signs of fragility with an overheated property market and an undervalued.
Despite all this there are some positive signs
- Confidence appears to be returning.
- House price falls have appeared to stabilise halting the long period of falls.
- If we do continue with a stagnating, the Monetary authorities will be able to maintain zero interest rates (there is even talk of negative interest rates), and pursue further quantitative easing.
- Exports have showed signs of picking up following weak pound and recovery in Germany and France