Bill Jamieson: The view ahead – ‘a recovery slower than the 1930s’

WHEN Bank of England Governor Sir Mervyn King declared earlier this month that this was the worst crisis we have ever faced, it was a shockingly pessimistic statement from a central bank governor whose job is, inter alia, to rally confidence.

Might there have been just a hint of hyperbole in that gloom-laden utterance? Worse than the 1970s we could grasp. But worse than the Great Depression and the 1930s? Had Sir Mervyn allowed his reputation as a gloomster to get the better of him?

Not, it seems, if you crunch the numbers now coming out on the UK economy. Most forecasts for growth in 2011 have now been cut to the 0.9 per cent- 1.2 per cent area.

For next year, few see much of an improvement – indeed, Citigroup is forecasting growth of just 0.7 per cent – a recession hopefully avoided but a pace of growth so faint as to be barely measurable. For 2013 – and this is the killer forecast – the group sees GDP rising by just 1.1 per cent – half the rate forecast by the Office for Budget Responsibility for this year.

Michael Saunders, chief UK economist for Citigroup, has looked back at previous recovery periods – and his findings are chilling. Comparing from previous pre-recession peaks, his forecast implies that the UK economy will even underperform the recession/recovery cycle of the 1930s.

GDP, he predicts, will not exceed the pre-recession peak (Q1 2008) until the final three months of 2014, fully 27 quarters later. This is a far slower recovery path than after the major recessions of the past 50 years.

Here are the figures as Saunders sets them out: “It took 13 quarters for GDP to regain the pre-recession level in the recession/recovery cycles of the early 1980s and early 1990s, and 14 quarters in the mid-1970s.

“Our forecast even implies a much weaker path than in the 1930s. GDP fell 6.9 per cent from the peak in 1930 Q1 to the trough in 1932 Q3 (similar to the drop in the current cycle, which was 7 per cent), but then recovered quite quickly, regaining the pre-recession peak in Q1 1934 (16 quarters later) and rising well above that level in 1935 and 1936.

“In these terms, the recession/recovery cycle will, we expect, be the worst of the last 100 years outside wartime. Indeed, the UK’s recent and prospective path for GDP growth (cumulative growth of just 0.9 per cent over 28 quarters from 1998 Q1 to 2015 Q1) is similar or worse to anything seen in Japan in the last 20 years.”

Why are the UK’s prospects from here so utterly bleak? The economy, he says, is undergoing a necessary and inevitable re-balancing – from government and consumer spending to exports and business investment – at a time of weak external demand.

The need for rebalancing is unarguable. The UK’s private debt-to-GDP ratio soared from 126.5 per cent of GDP in the first quarter of 2007 to 232 per cent in Q4 2008, similar to the peak seen 20 years ago in Japan. It is the debt hang-over from this boom, says Saunders, that is shaping and limiting recovery. “The path for consumer spending in the UK over recent years is, by some margin, the weakest among the G7 countries and even weaker than spending in Portugal and Spain.”

This is one of the bleakest assessments of our prospects that I have read. It is by no means the only one to have dropped into my e-mail box of late, but coming as it does from a respected economist and forecaster with no policy prescription to peddle, it has all the more force.

Now this bleak forecast is open to a double challenge. First, it does not allow for the prospect of a recovery in the global economy over this period. Slim though that prospect may look at present, some of the latest indicators on the US economy have been much better than feared. Second, the projections make no allowance for any change in government policy (though he does believe the Bank of England will resort to a full £500 billion throttle of monetary easing or “QE”).

While I have no doubt that the government will try and stick with its current deficit reduction plan over the coming months, it will come under enormous pressure to provide some sort of growth stimulus. Something must be done to lift us from a flat-lining “recovery” that trails even that of the Great Depression.