Double Dip Recession?
Almost a year has passed since the Chancellor was accused of talking the economy down by suggesting we were living through the worst crisis for 60 years. Now we assuredly know he was right. The latest disastrous quarterly figures from the Office for National Statistics (ONS) show the economy shrank 0.8% in the second quarter, a stat so much worse than the consensus forecast of 0.3% that City analysts were reaching into their lockers of hyperbole to describe their surprise.
Economic output has now shrunk by 5.7% in 12 months – an annual collapse rivalling the worst days of the Great Depression. And yet the London stock market continues to sail serenely upwards, nothing up a remarkable rally of 11 consecutive days of gains.
If the economic news is so gloomy, why are markets so cheerful? One reason might be that those quarterly figures feel wrong – and may well be revised upwards as more data comes in. Monthly GDP estimates from the National Institute, for instance, suggest that the economy reaches a turning point in the second quarter, and definitely rose in June.
The figures are certainly contradictory. By the ONS’s own estimate, Britain’s high streets are in a state of rude health with sales volumes rising significantly in June – hardly the sign of an economy mired in a slump. But, at the very least, this latest data shows that talk of imminent recovery was premature. At a plausible rate of recovery, it will take until 2012 before the economy gets back to where it was when recession began in the spring of last year. The worst may be over but… there’s a long road ahead.
Fears of a double-dip recession are probably overdone. The consensus view is that the recession, both in Britain and globally, should be over by the start of 2010. Bu the recovery will be neither straightforward nor swift, meaning markets are set to continue their white-knuckle ride of ups and downs throughout this year and… well into the next.
That is certainly the conventional wisdom after a fall in GDP this steep, but history shows that very few recessions last longer than two years. And most recoveries, once they start are strong… The pattern of duration is virtually identical, regardless of the size of the initial shock.
When a recession reaches a certain size or duration, recovery is harder and more sluggish. But it takes an awful lot to depress Keynes’s animal spirits for more than a couple of years. Markets are probably right in their upbeat outlook: capitalism seems a pretty resilient beast.