The danger of an L-shaped recovery

The latest figures from the International Monetary Fund to the Institute of Directors paint a bleak

The Times, nicknamed the Thunderer (from the line, published in the mid-19th century, "we thundered out the other day an article on social and political reform"), has inserted a firewall to stop free viewing of its website. I am not paying. The likely immediate effect is to soften its voice to a whisper. Founded in 1785, the Times in fact stopped thundering against the establishment some time ago. The columnist Bernard Levin, who died in 2004, is much missed. But the New York Times (founded in 1851) seems to have taken over the mantle. On 8 July, in an editorial titled "Britain's Budget pain", it thundered against what it called a "dark shadow", which is "the needlessly draconian emergency Budget" unveiled by Chancellor George Osborne.

The editorial went on: "In the days since, the misguided nature of this Budget has become clear. Some cutbacks were necessary, if only to reassure Europe's panicky bond markets. But the coalition's Budget aims to cut too much too soon, in pursuit of a pointless structural Budget surplus by 2015. Its real achievements are more likely to be drastically downsized public services and, if the fiscal austerity backfires, as it well might, a contribution to years of stagnation or worse in Britain and the rest of Europe."

Powerful stuff. And it went further. "No reputable economic theory justifies this bleeding. In fact, most mainstream economists have argued for delaying the most severe cuts until a more robust economic recovery has begun. The coalition Budget reflects Conservative Party ideology, which asserts that as the government withdraws money from the economy, private businesses and consumers will step in to replace it. That won't happen if Britons see only hard times ahead."

Gloomy forecasts

There are, indeed, going to be very tough days ahead, and the haemorrhaging that is to come is not based on any sound economics - sad that a foreign newspaper gets it while most of the British media do not. Cuts to the school-building programme will hit even the Tory heartlands, as a number of Conservative MPs are beginning to discover; so will cutting red tape in the NHS. The surge in youth unemployment I have been warning about for a couple of years is now hitting home and the papers are full of reports of graduates who can't find jobs. No wonder the public-sector unions are up in arms, and this is just the beginning. The big cuts in the autumn are going to be so much worse.

The Office for Budget Irresponsibility (aka OBR) has been much in the news after apparently fiddling the unemployment forecast downwards to help out the government. The Organisation for Economic Co-operation and Development added to the fire by saying that it expected the UK recovery to be "too muted to result in strong job creation" and that unemployment is "likely to recede only slowly". As a result, it predicts, the unemployment rate will remain at nearly 8 per cent at the end of 2011.

The International Monetary Fund revised its global growth forecast upwards, but, in view of the Budget cuts, downgraded its forecast of UK growth. It said Britain would grow by 1.2 per cent this year, the second-slowest growth rate in the G7 group and 0.1 points lower than its previous estimate in April. Next year, it expects growth to pick up to 2.1 per cent, 0.4 points down on its April forecast and below the 2.3 per cent predicted by the OBR.

Forecasts of GDP growth by the Institute of Directors were even lower: only 0.9 per cent in 2010 and 1.8 per cent in 2011. The institute's chief economist, Graeme Leach, colourfully predicted that the recovery would be L-shaped: "After a very abnormal recession it would be foolish to rule out the possibility of a very abnormal recovery as well. A whole host of reasons support the idea of one 'L' of a recovery."

blanchflower graph

Fathom Consulting predicts growth of only 0.8 per cent in 2010 and 1.6 per cent in 2011, with unemployment rising to 8.4 per cent in 2011. And the risks to growth are heavily skewed to the downside in Fathom's forecast, much more so than elsewhere. In this downside scenario, to which Fathom attaches a 40 per cent probability, growth next year is -1 per cent (followed by -0.2 per cent in 2012), and unemployment rises to 10 per cent and remains at that level through 2012. The chart (above) shows the considerable risks of re-entering recession - and staying there. This is the nightmare scenario that the Con-Dem coalition has brought into play.

Adding to concerns is new data on exports and imports. The OBR assumes that net trade - the balance between exports and imports - will make a big positive contribution to GDP growth in 2011 and onward. Data from the Office for National Statistics suggests otherwise. The trade gap widened to £3.8bn in May, the worst figure since July 2008. Exports rose by less than £100m (0.2 per cent), while imports climbed by £700m (2.4 per cent).

Deep down

This is consistent with the most recent Markit/ CIPS manufacturing survey, which showed that export orders dropped sharply last month. The strengthening pound and weakening growth in the euro area are hitting British exports hard. Alan Clarke, an economist at BNP Paribas, has it spot on: "If we are hoping that net exports are going to be the engine of growth that drives the economy out of recession, I fear we are going to be disappointed."

The latest data shows that GDP fell by 6.4 per cent from peak to trough during the recession, worse than previous estimates. Meanwhile, government spending in the first quarter of 2010 rose by 1.5 per cent, a whole 1 per cent more than reported earlier, and yet household consumption still fell. That the recession turns out to be deeper than thought, and the government's stimulus more important, makes it even more likely that the cuts will have a disastrous effect.

The British people are slowly beginning to see what they have let themselves in for, with this bunch of ideologues who are barely able to conceal their delight in the harm they are about to inflict. It is time to start thundering.

David Blanchflower is a labour economist and a professor at Dartmouth College, New Hampshire, and the University of Stirling.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 19 July 2010 issue of the New Statesman, Godless Britain