How bad is this recession?

This is shaping up to be the longest recession the UK has ever experienced.

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).

A

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

Tony Dolphin is chief economist at IPPR

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The 5 things the Tories aren't telling you about their manifesto

Turns out the NHS is something you really have to pay for after all. 

When Theresa May launched the Conservative 2017 manifesto, she borrowed the most popular policies from across the political spectrum. Some anti-immigrant rhetoric? Some strong action on rip-off energy firms? The message is clear - you can have it all if you vote Tory.

But can you? The respected thinktank the Institute for Fiscal Studies has now been through the manifesto with a fine tooth comb, and it turns out there are some things the Tory manifesto just doesn't mention...

1. How budgeting works

They say: "a balanced budget by the middle of the next decade"

What they don't say: The Conservatives don't talk very much about new taxes or spending commitments in the manifesto. But the IFS argues that balancing the budget "would likely require more spending cuts or tax rises even beyond the end of the next parliament."

2. How this isn't the end of austerity

They say: "We will always be guided by what matters to the ordinary, working families of this nation."

What they don't say: The manifesto does not backtrack on existing planned cuts to working-age welfare benefits. According to the IFS, these cuts will "reduce the incomes of the lowest income working age households significantly – and by more than the cuts seen since 2010".

3. Why some policies don't make a difference

They say: "The Triple Lock has worked: it is now time to set pensions on an even course."

What they don't say: The argument behind scrapping the "triple lock" on pensions is that it provides an unneccessarily generous subsidy to pensioners (including superbly wealthy ones) at the expense of the taxpayer.

However, the IFS found that the Conservatives' proposed solution - a "double lock" which rises with earnings or inflation - will cost the taxpayer just as much over the coming Parliament. After all, Brexit has caused a drop in the value of sterling, which is now causing price inflation...

4. That healthcare can't be done cheap

They say: "The next Conservative government will give the NHS the resources it needs."

What they don't say: The £8bn more promised for the NHS over the next five years is a continuation of underinvestment in the NHS. The IFS says: "Conservative plans for NHS spending look very tight indeed and may well be undeliverable."

5. Cutting immigration costs us

They say: "We will therefore establish an immigration policy that allows us to reduce and control the number of people who come to Britain from the European Union, while still allowing us to attract the skilled workers our economy needs." 

What they don't say: The Office for Budget Responsibility has already calculated that lower immigration as a result of the Brexit vote could reduce tax revenues by £6bn a year in four years' time. The IFS calculates that getting net immigration down to the tens of thousands, as the Tories pledge, could double that loss.

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

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