On Friday 23 January 2009, the Office for National Statistics produced the figures confirming what everyone knew: that the UK economy was in technical recession, defined as two consecutive quarters of negative growth.
For the last three months of 2008, gross domestic product slid by 1.5 per cent (worse than the 1.2 per cent expected), compounding the 0.6 per cent fall that had already been registered in the third quarter of the year.
So how bad and how long is the recession going to be?
The banks still aren’t lending; consumers still aren’t spending; the housing market continues to fall in value; retailers are shutting up shop by the high street brand-load; sterling is shaky against the dollar and the euro; and unemployment is beginning to climb sharply. The short-term outlook, therefore, is not a hopeful one.
A number of analysts are predicting that the recession will last throughout 2009; that’s six consecutive quarters in which the economy will shrink by up to as much as 3 per cent according to some pessimistic estimates.
The average lifespan of a post-war recession (there have been ten affecting the major economies) is just over ten months. If the current downturn does endure for six quarters that will make it long by modern standards.
The last two recessions, for example, in the early 1980s and the early 1990s, chalked up five consecutive quarters in which GDP declined.
News that the economy contracted by 1.5 per cent in the final quarter of 2008 – the largest three-month slide in GDP since the second quarter of 1980 – indicates that conditions are already worse than those prevailing in the last significant downturn of the early 1990s.
Think-tank, the Centre for Economic Business Research (CEBR) said that the scale of the contraction carried more weight than the simple fact that the UK is officially in recession. Charles Davis, an economist that the CEBR, believes that the UK economy could be sailing into a recession worse than any experienced in the post-war years.
Hann-Ju Ho, a senior economist at Lloyds TSB, said that the UK could only look forward to negative growth in 2009, this to be followed by a modest recovery early in 2010.
While the prospect of a collapse of the banking system may have been averted by government action, GDP has clearly taken a hammering, which suggests that the economy may be entering a period as turbulent as the early 80s.
John Cridland, the deputy director general of the CBI, said that the recession has already surpassed the depths of the early 1990s but he retained some optimism that its effects may not be as far-reaching as those experienced in the 1980s.
He cited the 6 per cent peak to trough low that the economy had to cope with 25 years ago as evidence that the decline in growth may not be quite as severe this time.
That said, the wave of the slowdown washing over the economy will still probably, over the coming four quarters, outstrip the 2.5 per cent peak to trough seen in the 1990s.
There is, however, a point of difference between now and the early 80s, which was highlighted by Mr Cridland: this recession is international and cross-sector rather than localised. “This is truly global,” he said. “That is a worry because normally one market pulls up another, but when it is global everyone suffers. Often a recession has a heart in one sector and that is buoyed up by others. This one started in the construction industry but it has now spread to pretty much all sectors.”
Others are slightly less sanguine. Vicky Redwood, an economist at Capital Economics, predicts a conclusion to the downturn but not until late 2010 and only when unemployment has hit 3.5 million. “If the government wants to see a recovery sooner it needs to take even bolder action and force the banks to start lending again,” she said.
What is clear is that the credit crunch has now thoroughly transmuted itself from a financial crisis into an economic struggle.
