The UK Recession

We're in the middle of the worst recession of all time, you can't get a job for love nor money, and the UK is practically a third world country, right? Wrong. However, Britain is still suffering significant pain as a result of the current recession. So, how does this recession compare to those of the past, how far through the recession cycle are we and what will the recovery look like when it does arrive?

Mass hysteria fueled by media hyperbole has been a prominent feature of this recession. The media has failed to communicate that 'the worst financial crisis of all time' does not equate to 'the worst recession of all time'. Compared to the 25% drop in UK GDP suffered between 1918 and 1921, this recession has been peanuts.

Still, two quarters of significant falls in GDP, a 1.8% increase in the unemployment rate, an annual rate of decline in house prices to April of 17.7%, a drop in the manufacturing industry's output of 12.9% in the year to March and the fall of Sterling from $2.10 to $1.50 has led Brits to feel like any hope of imminent recovery is wishful thinking.

However, the current stats seem to indicate a different picture. The rises in unemployment (usually a lagging indicator) are slowing down. House prices in May rose 2.6% while the number of loans approved for house purchases rose for a third successive month. Demand in the service industry (Britain's main engine of growth for decades) rose for the first time in a year, and declines in demand in the manufacturing industry slowed down. Sterling is rising against the Dollar again, and the stockmarkets have been looking up for months.

So, is this the start of the rapid recovery predicted in March by noted economists Paul Krugman and Brad Delong? Well yes, and no. The likelihood is that GDP will start to recover towards the end of the year. However, as Greg Mankiw pointed out to Krugman (and Krugman later conceded), recoveries from recessions induced by financial crises have historically been long and drawn out affairs.

There is still a lot of bad debt in the UK system, and that will take a long time to clear out. The banks will not be able to lend anywhere close to previous levels until they have confidence that the debt they do own will be paid back, and the private sector will be hampered until that occurs. If you take into account the inevitable increase in regulation of the banks, the outlook certainly isn't one of unbridled dynamism.

So expect GDP to start growing again in the next 6-10 months, and unemployment to start falling 12-18 months after that. However, don't expect a return to the heady growth in incomes that we had become used to for many years to come.