The recession is not over

Synopsis: The latest figures from National Statistics suggest the UK economy is still shrinking.

Is the UK still in recession?

In the days before last Friday´s release of GDP figures from National Statistics, most economists would have said ´probably not´. The consensus forecast was for GDP to have shown an increase in the third quarter of 2009, albeit by only 0.2%. The Bank of England had pencilled in +0.1% while the pessimists were at the 0% end of the scale, which at least would have marked a technical end to five successive quarters of decline.

In the event, National Statistics´ first estimate of third quarter GDP growth was -0.4%, compared with -0.6% in the second quarter. The drop came as an unwelcome surprise and means that the current recession is now the longest since current records started in 1955. The UK economy has now contracted by 5.2% in the last year and 6.0% from its first quarter 2008 peak.

An arguably better way of understanding what the statistics mean is to look at the historical size of the economy, a method preferred by Mervyn King. On that measure, in inflation-adjusted terms the UK economy is near enough back to where it was in the third quarter of 2005: it is as if the last four years had never happened. Even if the economy now started growing at its previous norm of around 2.5% pa, the UK will have still lost those four years and its economy will be about 10% smaller than it otherwise would have been if the recession had not come along.

The consequences of the GDP reading can be summarised as:

• The Chancellor´s position has been complicated further. His April Budget forecast assumed a 3.5% contraction this year. The economy has shrunk that much in the first nine months. More seriously, Mr Darling had assumed 1.25% annual growth in 2010, which is now looking optimistic. The smaller and slower the economy, the worse tax revenues will be.

• The possibility of a rise in interest rates has moved even further away. The Bank of England is now more likely to extend quantitative easing (QE) when it meets next month. Before the GDP numbers were issued, the expectation was that QE would go on hold.

• Sterling will continue to be weak. The pound dropped 1.5% against the euro and the dollar on the news.

COMMENT

Preliminary GDP figures are prone to revisions, so these numbers need to be treated with some caution. Nevertheless it would need an unusually large revision for third quarter 2009 GDP to turn positive.