Analysts Say U.K. Recession Is Over

The recession is over, according to one of the nation's most respected economic think-tanks.

The UK's surprising resilience is confirmed by the National Institute of Economic and Social Research (NIESR), an independent body with an enviable record for accuracy. It says that the economy hit rock bottom in as early as March and returned to growth, albeit modestly, in April and May.

The institute says that the economy grew by about 0.2 per cent in April and by 0.1 per cent last month. Although hardly a return to the boom conditions that prevailed before the credit crunch, these figures mark the end of more than a year of stagnation and recession, and stand in stark contrast to the grimmest predictions of a 1930s-style slump. Ray Barrell, director of forecasting at the institute, said that "the evidence from the last few months is that we may well have reached the bottom of the depression".

The Bank of England's radical cuts in interest rates and its programme of "quantitative easing"—injecting cash directly into the economy—were singled out by the NIESR as major reasons for the turnaround. According to the institute, if the recovery is sustained then the current downturn will have been less severe than those of the 1930s and the 1980s, although still more grievous than the one the economy went through in the early 1990s.

If the economy has indeed returned to growth when the official figures for the second quarter of this year are announced next month, then the Chancellor's forecast in his Budget in April that the UK would return to growth by the end of the year will have been delivered spectacularly early. What is more, the UK will also be one of the first major European economies to emerge from the downturn. It will be a much-needed boost to a Government that has seen its reputation for economic competence shredded during the credit crunch. A Downing Street spokesman said: "There are signs that the Government's actions to support the economy through this difficult downturn are having an effect but there are absolutely no grounds for complacency."

Surveys of business confidence also suggest that the economy will soon return to modest growth. "The... figures generally bode well for a recovery and it's feasible that GDP will have posted a gain over the second quarter," said Philip Shaw, UK economist at Investec.

Alan Clarke, an analyst with BNP Paribas, agreed. "We are accumulating more and more evidence that the recession is over. To be clear, we are not heading for a boom. The economy is still likely to grow much slower than potential, in turn meaning that unemployment will continue to rise. But the point is that the economy is no longer shrinking."

Having endured a year where output fell by a fifth—and by up to a half in particularly hard-hit sectors such as car-making—it is manufacturing that seems to be securing a period of stability.

The Office for National Statistics said yesterday that manufacturing output rose last month for the second time, a much better result than economists had been expecting. The monthly rise in each of March and April was 0.2 per cent, above forecasts. Car production is up 8.5 per cent, and pharmaceuticals up 5.5 per cent. An increase in North Sea oil production pushed overall industrial production higher still. The latest trade figures showed deterioration but even there the trend is encouraging, with exports improving faster than imports, a reflection of the stabilisation of world trade and the weakness of the pound.

Much of the improvement, says the NIESR, is simply due to the fact that retailers and other businesses have stopped "destocking", where they sell or produce from existing inventories rather than ordering in new supplies. But the NIESR also suggests that the cost of borrowing money has been falling sharply in recent weeks. This, says Mr Barrell, is a direct result of the Bank of England's successful programme of "quantitative easing"—designed to boost demand and, eventually, push inflation back up to the official target of 2 per cent (prices are due to fall later this year).

Some £125bn has been or will be soon spent by the Bank on buying government securities and pushing cash into the financial system. Mr Barrell suggested that the policy had worked so well that the Bank's Monetary Policy Committee might wish to put the policy on hold. The Government's public spending increases and tax cuts had had a less dramatic effect, he added.

There has also been evidence in recent weeks that some stabilisation in the housing market may be seen over the next few months, with both the Nationwide and Halifax reporting a jump of about 2 per cent in property values last month. While such figures are usually erratic, a gradual return of buyer confidence can be glimpsed in improving figures for new buyer enquiries at estate agents and a small upturn in the number of new mortgage approvals, although these remain far below normal levels, and first-time buyers are typically being asked to find a 25 per cent deposit. The credit crisis seems to have moderated more for companies than it has for individuals.

Doubts remain in some official quarters as to the strength and sustainability of the recovery. In remarks to the Leicester Mercury during a visit to the Midlands, Kate Barker, a Bank of England policy-maker, commented that "manufacturing orders are starting to come back, but whether that's a stocking issue or a turn-up in final demand isn't so clear... The really important question is whether there's a pick-up in the economy and if people can sustain that so it continues on to autumn."

Hers are the latest in a series of cautious remarks from Bank figures over the past few weeks. "Our present view is that we think [interest] rates could stay low for quite some time," she added.So is the recession over? View from the frontlineTheo Paphitis, owner of Ryman and star of the Dragons' Den series: "I don't think we are anywhere near the end of the recession. We have probably had a bit of growth but this will definitely be a W-shaped recession. We have got a lame duck Government."Sir Martin Sorrell, founder of the advertising agency WPP: "We hadn't noticed. The second half looks a little better than last year but that's because the comparative period was so weak. If you're asking have we seen a significant change in economic conditions, [then] no, we haven't."Sir Philip Green, retail billionaire: "Businesses are not being funded properly. Unless the banking sector starts doing business we are going to continue bumping along where we are."Lloyd Blankfein, chief executive officer of Goldman Sachs: "I think it's going to be a long protracted [global] recession. There is no reason to think this is it... So many things have to be sorted out. Why would this be the recovery? The chances are it's not."

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE