The recession is probably over, leading experts declared yesterday, as evidence showed that key parts of the economy were growing again.By Edmund Conway and Angela Monaghan
The National Institute for Economic and Social Research, one of the foremost independent economic forecasters, estimated that Britain had seen economic growth in the three months to August.
Its announcement coincided with figures showing that the manufacturing sector was enjoying its strongest growth for 18 months, that consumer confidence was recovering and that the jobs market was improving for the first time in almost a year and a half. The stock market has bounced back, with shares in London hitting their highest level of the year yesterday. Estate agents reported that house sales and inquiries were up by more than 50 per cent in August on the same month last year.
The head of the International Monetary Fund also predicted that the world was likely to pull out from its economic slump earlier than expected.
Economists said that the data and forecasts indicated that Britain’s economy was growing for the first time in more than a year and a half – and the recession was most likely over. A recession is officially defined as the economy shrinking for two or more successive quarters.
The figures were a major boost for Alistair Darling, the Chancellor, who earlier this year insisted, to the derision of most observers, that the economy would be growing again before the end of the year.
In a further tonic for Mr Darling and Gordon Brown, Ray Barrell, the chief forecaster at the institute, said that government policies, alongside the Bank of England’s decision to slash interest rates to nearly zero, were largely to thank for the recovery.
Making particular reference to the car scrappage scheme, a £2,000 incentive to buy a new car, and the decision to cut VAT to 15 per cent, Mr Barrell said: “We are expecting growth in both the third and fourth quarters of the year, although only an anaemic rate of 0.3 per cent or 0.4 per cent. It has been partly boosted by the fact that the car industry has been stronger than expected, thanks to the Government’s scrappage scheme. Then there will be a boost from the VAT cut in the final quarter of the year.
“In short, the Government has been able to spend some of the money they were intending to spend.”
However, he gave warning that the coming months would be far from pleasant. “This is not going to be a V-shaped recovery,” he said. “This is going to be very tough. It will take until late 2012 for the economy to return to the size it was at the peak in 2008. This will be a long, painful recession.”
According to the Office for National Statistics, the manufacturing sector grew by 0.9 per cent in July, the biggest leap since early 2008, helped by sales of cars to both British and overseas customers.
“These data support other signs that the overall recession is ending,” said Michael Saunders, an economist at Citigroup. “We do not expect that recovery will be rapid, because of poor credit supply and the need for major fiscal restraint to get the public finances back on a sustainable path. Even so, as these data indicate, upside surprises in activity data continue to outweigh downside surprises.”
Alan Clarke, an economist at BNP Paribas, said: “[It is] a good start to the third quarter and adds to the weight of evidence that suggests the recession is over.” Recruitment agents reported that permanent job appointments rose for the first time in 17 months in August. The Recruitment and Employment Confederation also stated that temporary appointments increased and vacancies declined at a slower pace.
Last month, the Nationwide’s consumer confidence index rose to its highest level since May 2008, up two points to 63. Countrywide Estate Agents, which has more than 1,000 branches, said that it had seen a 69 per cent increase in inquiries from potential buyers and a 53 per cent rise in sales in August, compared with a year earlier.
However, many leading authorities remained sceptical that the figures were anything other than a blip in the midst of a lengthy slump.
David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, pointed out that the institute previously called an end to the recession in the spring, before data subsequently proved it wrong.
“I am worried that in the UK and the rest of Europe people don’t appreciate that unemployment is still rising, and that this, alongside rising negative equity, will be extremely damaging for confidence and for the broader economy,” he said. “Despite these figures, banks are still not lending; these are not green shoots – they are just noise.”
Dominique Strauss-Kahn, the managing director of the International Monetary Fund, said: “For the [global] economy, we have been saying for a year that the recovery will come in the first half of 2010. It might even be a quarter ahead. We are seeing the end of the tunnel, but we are still in crisis.”
Tomorrow, the Bank is expected to leave interest rates unchanged at 0.5 per cent, and to carry on with quantitative easing — pumping cash directly into the economy. However, Prof Blanchflower said that it would be unwise to rule out further action.
In a further boost, Britain’s triple A credit rating is unlikely to be reduced, as had once been feared, even though the country’s budget deficit will soon be the worst among advanced economies.
Moody’s, the rating agency, will announce today that the rise in debt appears affordable, due to the political consensus that there must be spending cuts.
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