549-day recession is over – thanks to a lack of prudence

Published on Tuesday 26 January 2010 21:50

THE UK's recovery from its longest recession for 50 years was based largely on a pre-Christmas credit splurge, placing further question marks over whether growth can be sustained.

• Gordon Brown was taken to task by shadow chancellor Osborne. Picture: Getty

New figures show Britain's love affair with credit returned with a vengeance in the run-up to the festive period, with consumers lashing out 4.34 billion on finance in November alone.

It represented the first monthly increase in consumer credit since April 2008, when the recession began. Analysts said it was only as a result of this that the country emerged from recession at all.

With vital sectors such as construction and banking still flat-lining, there were warnings Britain could slip back into negative growth later this year. Aside from consumer spending, the only other significant area of growth was in the public sector, where funding is being sustained by the vast UK budget deficit.

Nevertheless, Chancellor Alistair Darling insisted yesterday that he "absolutely" stood by his projection of growth this year of between 1-1.5 per cent. He said there were "many reasons to be confident", given lower-than- expected unemployment, repossessions and business failures.

But critics warned that, with UK banks still reeling from their exposure to the US housing market, and unemployment dampening demand, there was a real risk of a "double-dip" recession.

Output figures for the last quarter of 2009, released early yesterday, were expected to show a return to growth but the margin of 0.1 per cent was far smaller than predicted. Scotland won't report until April.

It represented the first positive figure for 18 months, ending the longest period of negative growth since statistics were first recorded in 1955. The overall fall in GDP last year of 4.8 per cent was the biggest drop since records began. The UK had been the last major economy to emerge from recession. Europe's two biggest economies, Germany and France, grew last summer. Japan and the US also emerged last year.

The Office of National Statistics said the main reason for UK growth was the boost in spending on retail, wholesale, cars, hotels and restaurants. It is understood that the car scrappage scheme was particularly significant, tempting thousands of motorists to trade in their old models.

The figures on credit from the Finance and Leasing Association (FLA) showed that spending on car finance rocketed by 36 per cent, to 936m, year-on-year.

There was also a year-on-year 4 per cent rise for in-store credit, such as hire-purchase agreements, and a 2 per cent jump in borrowing through store cards.

The FLA said that much of the increase was likely to be due to consumers moving purchases forward to beat the VAT increase at the beginning of this year.

Experts warned last night that, with VAT now having gone back up, a consumer-led return to growth may fail to materialise.

Daiwa Capital Markets economist Colin Ellis said: "These sectors will have been boosted by the pre-announced VAT rise in January, and the car scrappage scheme – suggesting that, on an underlying basis, the economy only stagnated at best. Never has an end to a recession been so underwhelming."

Grahame Smith, general-secretary of the STUC, warned: "The STUC's fears the recovery will be very slow and protracted are confirmed by today's statistics, which provide scant comfort for the 200,000 people unemployed in Scotland. On this evidence, it is entirely possible that Scotland will remain in recession for a further quarter."

The markets also took a dim view of the GDP figures, with the pound falling against the dollar and euro. But the news led to further bets that the Bank of England will keep a lid on interest rates, as low growth should ensure inflation does not get out of hand.

Business chiefs said last night that low interest rates were vital if recovery was to be assured.

John Wright, chairman of the Federation of Small Businesses, said: "To strengthen the recovery, it is important we boost consumer confidence and demand, and that interest rates are held steady as continued investment in the economy will be the key to ensuring a sustainable recovery."

The FSB also urged ministers to rethink plans to increase employer National Insurance contributions from April.

Scottish finance secretary John Swinney said the figures showed that recovery would be a "slow and extremely fragile process".

He added that the weakness of the recovery underlined the need for the UK government to advance more cash to spend on infrastructure projects north of the Border.

"Today's figures should act as a wake-up call to the Chancellor. We cannot afford to simply sit back and hope recovery takes hold – instead we need to go on investing in recovery by further accelerating capital spending," he said.

Shadow chancellor George Osborne added: "Let's be clear – this is about as weak growth as you can get." He said the figures had shown up as "nonsense" claims by Prime Minister Gordon Brown that the UK was better prepared than other nations to tackle recession. "We were badly prepared for this recession and we're badly prepared for recovery," he said.

However, Mr Darling said the Tory plan to reduce government spending immediately after the general election would be dangerous. "If you start taking money out of the economy and cutting too early, you will end up wrecking the recovery and that is a risk I do not think we should take, especially given that we have come through one of the deepest recessions in modern times."

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