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Andrew Sissons
Researcher, Big Innovation Centre
T 020 7976 3609
Andrew  Sissons

The road to recovery: we’re in for a bumpy ride

Authors: Andrew Sissons Andrew Sissons

26 April 2011

Tomorrow’s (26 Apr) figures on the UK’s economic growth in the first three months of 2011 have taken on an unusual significance. After a shock contraction in the final quarter of 2010, some commentators will view the numbers as a verdict on the Coalition’s growth strategy. Another contraction in GDP – unlikely though that seems – would officially place the UK back into recession. By contrast, a strong increase would demonstrate that Britain has bounced back from the winter weather, and is well on the way to recovery.

There have been a number of good signs for the UK economy during the early months of 2011. The latest employment figures showed an extra 143,000 people in work in the three months to February, although this had little impact on unemployment. The ONS’ indices of services and production showed a strong rebound from the weather in January, while the UK’s persistent trade deficit finally began to fall in February.

But despite these positive indicators, more recent statistics paint a gloomier picture. The much-vaunted resurgence of the manufacturing industry appears to have experienced a blip, with the ONS index showing no growth in February, and a CBI survey showing a drop in manufacturing orders during April. The crisis in Japan, and its knock-on impact on the global manufacturing supply chain, is unlikely to have helped UK manufacturers. There have also been some negative signs from the UK retail sector.

On balance, the chances of a double-dip recession appear slim, but a rapid recovery does not look likely either – a Reuters poll of economists suggests that the growth figures will be around 0.5%. The NIESR has a more interesting take – it forecasts growth of 0.7%, but attributes the majority of this increase to a rebound from the weather. The underlying growth rate for the last six months, NIESR estimates, is just 0.1%.

All of this suggests that the UK economy still has a long, bumpy road ahead of it. The full thrust of the government’s fiscal tightening only hit in April, while above-target inflation makes a rise in interest rates likely before the end of the year. Both of these will present a serious barrier for the private sector recovery to overcome.

Tomorrow’s figures matter, because they will tell us a lot about the trajectory that the UK economy is on. A brief glance at NIESR’s chart of past recessions indicates how high the stakes are. As the infamous “W-shaped” recession of the 1930s attests, the pain inflicted by a recession is defined as much by the strength of the recovery as by the initial severity of the decline. With 2.5 million people in the UK unemployed, including nearly a million under the age of 25, the need for sustained, balanced growth could hardly be more pressing.