The Staggers 28 October 2011 How bad is this recession? This is shaping up to be the longest recession the UK has ever experienced. Print HTML The first estimate of UK real GDP for the third quarter of 2011 is due to be published on 1 November. Analysis of monthly data and measures of business and consumer confidence suggests it will show growth of around 0.4 per cent compared to the second quarter. Most of this growth will be due to special factors that held back output in the second quarter: the extra bank holiday for the royal wedding and the disruption to supply lines caused by the Japanese tsunami. With the economy not having grown at all over the previous three quarters, this means the economy will have grown by the same 0.4 per cent over the last year. Technically, this is not a recession - but it is about as close as it is possible to get to a recession without actually being in one. In fact, it could be argued that the UK has still not emerged from the recession that began in 2008. Even after 0.4 per cent growth in the third quarter, real GDP will be 4 per cent lower than its peak level, reached in the first quarter of 2008. In none of the five previous serious recessions experienced by the UK economy in the last 100 years has real GDP been so far below its peak at a comparable period (data for the 1920s and 1930s are taken from NIESR). On this basis, this is shaping up to be the longest recession the UK has ever experienced. If we take the Office for Budget Responsibility's (OBR's) latest forecasts for 2011Q4 onwards, real GDP will not exceed its previous peak until the second quarter of 2013 - fully five years after the recession began. This will make it a year longer than the previous longest recession - the one that began in 1979. But the OBR's forecasts were made in March. The outlook for growth in the UK has deteriorated since then. Independent forecasters have been revising down their growth forecasts for 2011 and 2012 and the OBR is likely to do so too when it publishes its new forecasts on 29th November (alongside the Chancellor's Autumn Statement). If these new forecasts prove correct, this recession could last as long as six years. Of course, as the last year has shown, there is a wide margin of error in growth forecasts, even for the relatively short-term. One reason for this year's disappointing growth has been higher food and energy prices, which have squeezed households' spending power, reduced demand and so led to cutbacks in output. If food and energy prices should fall sharply in 2012 - and they are more volatile, and thus harder to forecast, even than real GDP - then these effects could go into reverse. By this time next year, the economy might be growing at a healthy rate. However, there are also reasons to fear growth will remain very weak for the next few quarters. Most areas of the global economy - even China - are less dynamic than they were a year ago. In particular, the effect of the euro zone sovereign debt crisis on the UK economy has only been felt in the last few months and it is likely to affect UK exports until well into 2012. The Chancellor talks of Britain being a safe haven in a storm, but even he must realise that the storm brewing in the euro zone has the potential to wreak havoc with the UK economy. Despite the uncertainties, what is apparent is that the 'expansionary fiscal contraction' hoped for by the Chancellor and his supporters - in which cuts in the budget deficit would unleash a wave of entrepreneurial activity and strong private sector growth - has failed to materialise, and is unlikely to do so. As the Keynesians rightly warned, businesses are worried first and foremost about demand for their goods and services. Unsurprisingly, they have taken the view that a hike in the rate of VAT and substantial cuts in public sector spendingand employment, at a time when interest rates are already at rick-bottom levels, will reduce demand. So they have been extremely cautious about increasing investment spending and hiring extra workers. After the GDP figures, all eyes will turn to the Autumn Statement. It is already too late to avoid this recession being the longest in the UK's history, and the external environment means 2012 may be just as tough a year as 2011. But it is not too late to take steps to promote stronger growth in the UK over the medium-term. Those hoping for a change of course on the pace of deficit reduction are likely to be hoping in vain. The Chancellor and the Prime Minister have too much political capital invested in Plan A. Is it too much to hope, though, that the Chancellor, spurred by the underperformance of the economy over the last year, will announce a proper plan for growth? Not one that starts from a set of measures agreed by the coalition partners and attempts to build a plan around them. But one that starts by identifying what is needed for the economy to grow - increasing supplies of capital, labour and land and better ways of utilising them - and asks how these might be achieved. Perhaps it is; we will have to wait and see. Tony Dolphin is Chief Economist at ippr › Web Only: best of the blogs Tony Dolphin is chief economist at IPPR From only £1 per week Subscribe More Related articles 7 problems with the Snooper’s Charter, according to the experts The buck doesn't stop with Grant Shapps - and probably shouldn't stop with Lord Feldman, either The Fire Brigades Union reaffiliates to Labour - what does it mean?