When will the recession end?

Well, it's all a question of definition. And by the traditional definition it could be over by the end of this year. However, the pain will endure rather longer.

A recession is a period when economic output declines; in the UK the precise definition is 'two consecutive quarters of negative economic growth - when real output falls'.

The first quarter that saw a downturn was July to September 2008 when the UK's GDP fell by around 0.5 per cent. There was a further decline in the quarter to December 2008 and during 2009 output is expected to fall by 4.25 per cent (IMF) and then start to pick up in 2010.

We will be declared to be 'out of recession' once we have two successive quarters in which GDP does not decline. That, of course, is a different measure entirely from the one that says we will be back on track once we have made up all the GDP we have lost. That's going to take a while longer.

Just how long is made clear in a graph published by the IMF in the paper they released yesterday (pdf).

This suggests that by mid-2012 UK output will still be around 1 per cent below where it was in June 2008. Now that's a long recession and as you can see from the graph, longer than any that most of us can remember. The damage is all the greater when you consider that our national losses are not only the fall in output but the fact we have missed out on the growth we would in normal times have had in those years - probably another 8 or 9 per cent.

There's plenty more in that IMF paper too: especially notable is the impact that the UK's economic problems have had on other countries (it's untrue that it's all the fault of the USA) and the insistence that government borrowing has to be sorted out - which of course means we need government spending cuts and tax increases.

House prices

It's been reported today that housebuilder Barratt has seen its average selling price for private homes drop by 19 per cent to £166,000 over the past year. What will happen next?

In the US prices in many areas have dropped by more than 30 per cent and there are expectations that the falls will continue. Some of the statistics are contradictory, but it does seem clear that price reductions in the UK have moderated - but will they now hold steady or fall again?

A continuation of prices downwards here or in the US will damage the banks, with more people sinking into negative equity and more loans turning bad. And of course much of the UK economy is linked to the housing market: builders, furnishers, estate agents, financial services and so on.

Despite the drops we have already seen, there are plenty of commentators who believe we in Britain may still be only half-way down to the likely low point. And in absolute terms, of course, our prices remain far higher than elsewhere. I was discussing this issue with someone in the US earlier this week and was told that in parts of the mid-West you can now find good two bedroom houses with a garage for $80-$90,000 (roughly £50-£55,000). At that price level first time buyers can step into the market easily. That's not quite the case here.

The UK is different, of course, because of scarcity and that makes it all the more difficult to read the future direction of prices. Except that they are unlikely to climb significantly as long as unemployment continues to climb - as it probably will throughout the rest of this year.

Britain is deep in 'a fiscal black hole'

Economist John Kay has written a piece in today's Financial Times that highlights the problems any future Chancellor will face as a result of the 'obfuscation' of the current government. You can read the article in full here.

Meanwhile over at the Spectator (Speccie to its friends) Fraser Nelson - who yesterday joined in a spat with Ed Balls after accusing him of lying - has commented on John Kay's thoughts:

In the FT, John Kay has written one of those columns that quietly sums up the calamitous cost of Brown/Balls fiscal model. He concludes that we'll have to raise some £70bn of taxes and then inflate our way out of debt—and this is a theme worth looking at in greater detail because I suspect it is what George Osborne will end up doing. "This year, Britain is likely to incur a fiscal deficit of more than 12 per cent of national income," Kay starts. "This figure is completely outside the normal experience of developed countries in peacetime. How did it happen and what are its implications?" How it happened is that Brown and Balls used their verbal tricks to conceal their reckless leveraging up of the British economy. "The British government, ostensibly committed to this principle [of running surplus in the good times], has obfuscated to abuse it so that Britain entered the recession with a large underlying deficit. The downturn turned a substantial gap in public finances into a chasm. This situation was aggravated by the speed and scale of the recession and the realisation that many of the earnings from financial services, which had previously boosted tax receipts, had been illusory. The contribution of financial services to public finances has been not only removed but reversed."

So we're in a mess - and we may have to vandalise the value of sterling to get out of it painlessly.

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It's difficult to see how much longer Gordon Brown and his chums can maintain their present line of 'Labour investment vs Tory cuts'. The extent of the financial hole Brown has created is being hightlighted by more commentators daily.

The end of retirement

from The Economist

Demography means virtually all of us will have to work longer. That need not be a bad thing

WHEN Otto von Bismarck introduced the first pension for workers over 70 in 1889, the life expectancy of a Prussian was 45. In 1908, when Lloyd George bullied through a payment of five shillings a week for poor men who had reached 70, Britons, especially poor ones, were lucky to survive much past 50. By 1935, when America set up its Social Security system, the official pension age was 65—three years beyond the lifespan of the typical American. State-sponsored retirement was designed to be a brief sunset to life, for a few hardy souls.

Now retirement is for everyone, and often as long as whole lives once were. In some European countries the average retirement lasts more than a quarter of a century. In America the official pension age is 66, but the average American retires at 64 and can then expect to live for another 16 years. Average spending on public pensions across the OECD is now the equivalent of more than 7% of GDP (they cost America just 0.2% back in 1935). In some countries the current figure could double by 2050, to say nothing of the cost of private pensions and extra spending on health and long-term care.

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Note: Denmark has opted to index retirement age to the figure for life expectancy at 60 from 2025. The plan is that with early retirement the period with a public pension will then be around 19 years.

"The dog ate my homework"

Sorry.

In the computer age, the favoured excuse of yesteryear will no longer suffice. Instead, when the deadline for submitting school/college work arrives and the assignment is still not complete, today's student turns to corruptedfiles.com - a website service where for a modest sum a corrupt computer file can be purchased for submission.

The idea is that by the time the corruption is discovered, the work will be complete and the actual file can be sent.

Of course, such a ploy could never have a place in working life. Could it?

The economic recovery will be messy

Anecdotal evidence reported this morning suggests that residential property prices are again weakening. This really is no surprise at a time when prices remain at a high historic multiple of earnings and unemployment is set to continue to climb for at least the remainder of this year.

Yet only a week ago there were reports that the recession was over - that GDP may have been growing since April.

Well that may well be so but I'm not sure it really matters much. We are in an economic downturn; for most of us it will feel as though we remain there for many months after growth has resumed at its historic trend rate.

Throughout this unpleasantness there have been businesses that have thrived. Some fail at the best of times. But as we've said before, the recovery is frequently the most dangerous time for many enterprises as a resumption of growth in sales puts a strain on working capital - which means that some businesses will simply run out of money at the very time things are supposed to be improving.

And the risks continue; there are many commentators who believe we may experience a 'double-dip' recession - growth resumes and then we slip back into recession. This happened in the 1930s in the US when policy makers, perhaps unknowingly, put the brakes on too soon in an attempt to choke off the risk of inflation.

All of which means that the need for every business to have up-to-date information about its performance and to actively manage its cash position remains critical. Are your debtor days growing or declining? Which are the high risk customers that owe you money? How are they doing? Should you restrict the amount of credit you offer them?

The recovery from every recession is just as messy as the slide into it. Don't become a victim just as growth resumes.

Green shoots? Strictly for the colour-blind

By David Blanchflower in the Daily Telegraph

Over the past few weeks, there has been much talk of "green shoots", even of the recession having come to an end. But while recent evidence suggests that things around the world may indeed be getting better, there is plenty of cause for caution.

This was precisely the message contained in two excellent speeches given last week by my former colleagues on the Bank of England's Monetary Policy Committee (MPC). Paul Fisher, the bank's expert on markets, warned that if the banking sector cannot lend enough, it will restrain economic growth – and any recovery – significantly, causing households to save more and spend less. He argued that the domestic and global economies remain vulnerable to further shocks, especially given the low levels of consumer and business confidence.

Similarly,Paul Tucker, the bank's deputy governor, gave warning that "for the moment it is unclear… whether the financial system can generate the expansion of credit that will most likely be necessary to support recovery". They are spot on.

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