From the TUC

Avoiding a double-dip recession

16 Apr 2010, by in Economics

Does the fact the recession is officially over mean that now we should move on to dealing with the deficit? Even if this reduces the amount of demand in the economy? This was one of the themes of last night’s election debates, and I want to look at why cuts in public spending would be a threat to what is still a very weak recovery.

This recession has been remarkable for the comparatively low increase in unemployment we have seen. When it began, with very rapid initial increases in unemployment, I thought that the unemployment rate was likely to increase by about four percentage points. The actual increase has been about two and a half points, to just below 8%. I will say in my own defence that this was far from being the most pessimistic prediction; others foresaw unemployment rates matching the 11.9% we briefly suffered in the spring of 1984.

In fact, the unemployment rate has remained well below the level of the 1980s and 90s recession.

graph

And, after a recession that lasted a year and a half, the economy has started growing again.

graph

But even after an upwards revision, that growth was only 0.4%. The norm for the UK economy is growth of 2.5% – anything less than that will still feel like a recession even if we have technically begun the recovery.

If we are going to achieve that healthier growth, this recovery – which is still so fragile – has to be encouraged. A lot will depend upon the strength of the international economy, and the annual growth rate in G7 countries in the last quarter of 2009 was an encouraging 3.4%. But there are signs of fragility in the global economy, just as in the United Kingdom. The OECD predicts that G7 growth will slow down to 1.9% in the first quarter of 2010, and will rise only a little, to 2.3% in the current quarter. Another worrying factor from our point of view relates to how the growth at the end of last year was distributed among the various economies. In the next table, we can see that, while growth was strong in the USA, the picture was rather darker in the euro area – the most important UK business partner. Other key UK export markets – such as Ireland and Spain – are only just emerging from recession.

Growth in UK export markets

Country Growth
USA

5.6%

Germany

0.0%

France

2.4%

Italy

– 1.3%

The other factor that is vital to sustaining the recovery is public sector spending. There are four main components of demand: household consumption, government spending, investment and trade; when the non-government elements collapse the only source of demand is government spending. This table shows what held the economy together in 2009:

Contribution to growth, year-on-year, for the expenditure components of GDP, 2009

Households

– 2.0

Non-profit institutions

– 0.1

Government

+ 0.5

Gross capital formation

– 3.8

Exports

– 2.9

LessImports

– 3.6

Net trade

+ 0.7

The figure for trade here is a bit misleading – it’s positive because the recession means we have cut our spending on imports even more than the fall in our exports – the lower exchange rate for the pound has a lot to do with this. Last year, the only positive contribution to demand came from government spending.

Yes, thousands of jobs were lost last year, but as these figures show, without Government investment things would have been much worse. With the global and UK recoveries still so weak, our judgement is that now is the wrong time to start reducing government spending. Yes, the deficit will have to be addressed – how to do that is the subject for another post – but now is the wrong time to start.

One Response to Avoiding a double-dip recession

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