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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

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

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.

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