The Independent

Britain Finally Escapes Recession


Britain's worst economic downturn since 1921 is finally over, a leading economic think-tank said yesterday.

The National Institute of Economic and Social Research (NIESR) said Britain had contracted by 4.8 per cent in 2009 and described the downturn as "a depression". That contraction is the worst for 90 years, and more severe than in any single year of the Great Depression.

However, the NIESR said that in the last quarter of the year the economy grew by 0.3 per cent following the 0.2 per cent fall in the third quarter, which caught many economists by surprise.

Despite the improvement, the institute is still predicting a slow and grinding recovery, a forecast given weight by official figures yesterday which showed that manufacturing stood still in November for the second month running, when forecasts had been suggesting modest growth.

An improvement in oil and gas extraction meant that production grew 0.4 per cent from October to November.

Further concerns about how sustainable a recovery will be were prompted by Germany. Official figures showed that after modest growth in the third quarter, the economy ran out of steam in the fourth quarter, falling close to zero. It meant that for the year as a whole the German economy suffered a record fall of 5 per cent.

Britain, however, is the last of the world's major economies to come out of recession, if the NIESR's figures chime with figures from the Office of National Statistics. Its hotly anticipated first estimate for the fourth quarter will be published on 26 January.

Britain's economy has shed 6 per cent of GDP since the first quarter of 2008, and that makes the recession the deepest since annual records started in 1955.

The NIESR's quarterly projections have a standard error of between 0.1 and 0.2 per cent when compared with the initial estimates produced by the ONS. The institute said: "The broader picture of the depression is that output fell sharply for 12 months until March and has not changed very much since then, although evidence of a recovery is starting to emerge."

The NIESR is suggesting that the recent resurgence in house prices will come to an end next year and that nervous consumers will continue to save money and pay off debt amid the ongoing uncertainty over unemployment and the possibility of a second recession in the new year, the much-feared "double dip".

It added: "The recovery will be weak because consumer spending, housing investment and business capital spending will carry on falling in 2010, though by much less than this year. Private consumption will decline by 1.1 per cent despite rising disposable income as households save more; the saving ratio will rise from 1.7 per cent in 2008 to 6.1 this year and 8.9 in 2010. The further rise in saving next year occurs partly for precautionary reasons as unemployment continues to rise but it also reflects continued falls in housing wealth as house prices resume their decline."

Moody's (MCO), the credit agency, warned that the next government "was likely to tighten fiscal policy very sharply indeed once the elections are out of the way," regardless of its political hue.

It also noted that the Bank of England's quantitative easing programme was coming to an end and thereby its effective monetisation of Britain's budget deficit.

"It will be interesting to see what happens to gilt yields when the Government has to fund its large deficits in the market again," Moody's said.

Despite this, its grimmest predictions were reserved for smaller countries such as Greece and Portugal.

6 per cent

The NIESR's estimate of the total contraction during this recession.

from London, for Independent minds

James Moore is Deputy Business Editor for The Independent.

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