Economics: First light – is the economy really in recovery?

For six months or more, the news on the economy has been unremittingly bad. The 1.9% fall in GDP in the first quarter of 2009 followed a drop of 1.6% in the last quarter of 2008.

News from the job market seems to worsen by the day, while export opportunities are constrained by the worst year for the world economy since 1945. Without doubt, the UK is heading for its largest fall in output in any calendar year post-World War II. And, as Chancellor Alistair Darling’s Budget made very clear, the cost to the Exchequer (and us) of trying to kickstart activity and rescue the banking system will be felt for years to come.

And yet there has been a subtle, almost imperceptible change in much of the commentary on current trends. Until recently, much of the bad news was expected and already factored into media and policymakers’ opinions. Now, some positive, or at least less negative, news is emerging and while nobody should be rash enough to call them green shoots, it is probably fair to say there are some straws in the wind ­ hinting the worst may be behind us. Even the stock market seems to think the low point has been reached.

As at any turning point in the cycle, the signals are mixed and now the first good news in months is jostling with the bad stuff for column inches. The housing market was the first part of the economy to feel the squeeze and has been in the doldrums for more than a year. In the early months of this year, though, it started to show signs of life.

Mortgage approvals in February and March rose to their highest for nine months, albeit from a very low base. The Nationwide House Price Index recorded its first increase for 18 months in March (although along with the Halifax measure, it dipped a little in April) and several housebuilders reported higher viewing figures in the past few months.

It also appears that households are at last trying to deal with the huge debt burden.

Following the massive reduction in interest rates over the past six months, there was a net repayment of £245m of consumer credit, the first net repayment since the series started in April 1993. Additionally, in Q4 2008, homeowners used their own funds (to the tune of £8bn) to complement borrowing to add to their housing investment, the biggest net injection into the housing market since records began in 1970. Even so, retail sales data is still in positive territory and responses to the surveys are getting more upbeat.

What the last set of backward-looking national accounts revealed, moreover, was widespread destocking by businesses, as is usual at this point in a downturn. But destocking is a one-off adjustment and is replaced by the need to restock, the first step in the recovery process. More significantly, the closely-watched, forward-looking Purchasing Managers Index surveys is turning up. Although still below the key threshold of 50 (which implies the industry will contract), the responses have stopped declining. The April results for manufacturing and services were the highest since last August.

And, finally, there is even a glimmer of light on the credit front, according to the Bank of England’s Credit Conditions Survey. This qualitative research based on responses from the banks has been a catalogue of unrelieved gloom for the past 12 months, but the current Q1 survey, published in March, hints at a change. It reports that “credit availability to households and corporates was expected to improve over the next three months, associated with an improvement in the cost and availability of funds.”

None of this adds up to the end of recession, still less a recovery, but with some indicators turning up and others falling more slowly, it does suggest daylight on the horizon. There is a growing body of opinion that expects the recession to end by the last quarter of this year ­ that is, for the economy to stop shrinking. Past experience shows that the three major recessions in the UK since 1945 have lasted between four and six quarters, and if this one ends by Q4 2009, it will be a five-quarter recession ­ bang on average.

The recession will end because, statistically, recessions always end. At the lowest point of each of the previous three recessions, some commentators claimed the economic conditions then were the worst since Adam was a lad and that we were destined for a long period of very slow or even negative growth. But we came through them, as we will this one. Given the huge policy stimulus to the economy, it is really a question of when rather than if the recovery gets under way.

The authorities acted relatively quickly when activity turned down, but the measures all take time to feed through, something impatient policymakers and media commentators seem reluctant to allow. A long overdue correction to an unbalanced economy was always going to last months rather than weeks, regardless of the size of the stimulus. Sooner, rather than later, the concerns will be about the shape of the recovery, not the length and depth of recession.