Economists divided over duration of recession

As ever, the nation's economic think-tanks are busy envisaging differing versions of the future and there are contrasting weekly offerings on how quickly the recovery will come. Brokers opinions are also mixed (see the PB online poll results, opposite) the Organisation for Economic Co-operation and Development, has revised its forecast for contraction in 2009 from 3.7% to 4.3%; worse still, the organisation is predicting zero growth for 2010.

The OECD forecast, however, is at the gloomy end of the scale: the National Institute for Social and Economic Research has suggested that the recession is bottoming out, with growth returning in April and May 2009 by 0.2% and 0.1% respectively. Furthermore, the Confederation of British Industry believes that the economy will start to grow before the end of the year. However, Chancellor Alistair Darling has warned that rising oil prices might yet put a spanner in the works.

The Centre for Economics and Business Research said that the latest projection in March was a 4.5% annual contraction but that next month's will be a little more positive. An economist at CEBR, Jörg Radeke, told PB: "We have reached a turning point and the second-half decline will be less severe; we might even approach positive growth in the third or fourth quarters. At some stage, manufacturers will need to restock and increase their inventories."

Recovery roadmap

Radeke added that there will be sluggish growth in 2010, leading to a "dead-cat bounce", after which the recovery will kick in fully in 2011 and 2012; growth will not return to previous levels because of a substantial decline in public spending, while taxation levels will rise. Radeke also said that debt coming out of the system would hamper recovery: "There will also be deleveraging for both companies and private households. We have been living on high levels of debt and we expect the savings ratio for consumers to reach higher levels, especially as it had been declining to close to zero: when they save more, they will spend less. Similarly, high levels of debt at companies will not return. Lending in the housing and construction sectors will not reach pre-recession levels."

Overcapacity

Adrian Colosso, chief executive at Heath Lambert, said: "The rates of decline are nowhere near where they were, however there is still a long way to go. We are very aware of the changes in people's businesses and clearly communicating that to insurers. The pricing stability is there in the top sector but there is still overcapacity in the small and medium enterprise market and huge amounts of insurer competition. It is very difficult to put prices up with overcapacity. Right at the bottom, there are some rate increases and there are some large differentials between new business and renewals."

With the recession possibly bottoming out, the Financial Services Authority is already warning that banks and large institutions have not learned their lessons from the crisis. Speaking to a panel of MPs at a Commons Treasury Select Committee in June, FSA chairman Lord Turner said: "I do have concerns that we may see a more rapid return to risky trading activities than we had anticipated. There is a real danger that we don't seize the opportunities of this crisis."

As unemployment continues to rise, predictions of a recovery might appear of little relevance, yet it seems that despite potentially storing-up long-term problems for the future with regard its own debt levels, the government's short-term measures should see us out of the worst recession for over 60 years by the end of 2009.