Recession or no Recession

This will be my third and final post for now on recession and related matters. A return to more positive postings is promised for October!

I wrote previously of economists I had listened to at conferences telling of a slow exit from recession, and of other more recent surveys showing that there may not be 'green shoots' after all - But with the release on 23 July of the initial figures for second quarter economic growth, it could be said with some certainty that the UK has seen three consecutive quarters of growth, bringing an end to the most recent recession.

The average length of recession in the UK has been three consecutive quarters, with a fall in economic output of just over 2%. To put the 'Great Recession' (as we shall now refer to it, Q2 2008 to Q3 2009) in context, it was the longest and deepest on record with a term of six consecutive quarters of contraction and an aggregate fall in GDP of 6.2%. It beats by some margin the notorious 1980’s recession which saw a fall of 4.7% from peak to trough.

In fact, the preliminary estimate for growth for the April to June period was surprisingly strong. The Office for National Statistics estimates that real gross domestic product increased by 1.1% compared with that of three months earlier and 1.6% on a year-on-year basis. Of course, initial estimates are often revised – they are based on only around 40% of the final surveyed data – but this surprising level of momentum in a recovery is undoubted good news. It is also encouraging that the data suggests that the economic gains were broad-based, with growth in services (1.7% year-on-year), production (1.5%) and construction (5.8%).

The outlook is not one that supports sustained strong momentum, however (remember previous postings speaking of a gradual exit from recession, not boom, nor bounce). There are fears that the coalition Government’s commitment to cutting the deficit so swiftly – combining tax rises with austere spending cuts and welfare reforms – is likely to weigh on domestic demand, particularly if the labour market remains weak. Much depends on the performance of Britain’s exporters.

Britain presently imports more goods and services than it exports (the deficit is in the region of £7–£8 billion) meaning that our trade position tends to act as a brake on economic expansion as measured by GDP. An improved export position would encourage higher growth rates.

Currently, over half of British exports are bound for the euro-zone. Looking ahead, it seems likely that continental demand will be dampened as increasingly austere measures are introduced (see previous blog post on what we might expect in the upcoming HM Treasury economic review) to combat deteriorating government balance sheets - witness the reported imminent collapse of Ireland...?

On the continent the Greek Government’s debt crisis has not yet run its course and problems persist in Portugal, Spain and Ireland. These problems have taken their toll on the value of the euro.
Sterling gained 10% vis-a-vis the euro in the first seven months of 2010. Unfortunately that has the effect of increasing the relative cost of British goods for continental purchasers.
Indeed, June and July brought some renewed strength for sterling relative to the US dollar, the Canadian dollar and the Japanese yen.

More comment on the above, as usual in our Monthly Market Commentary (for clients of Green Financial with larger sums invested) but as promised at outset, cheerier topics to come in the blog in October :-)