We’re not out of the woods yet. That’s the message from Threadneedle Street this week as the Bank of England published its quarterly inflation report, pouring cold water on hopes of a swift recovery for the British economy. We’re in for a “slow and protracted recovery”, warned Meryvn King, and with inflation forecast to settle below the Bank’s target rate of 2%, we shouldn’t expect a renewed tightening of policy any time soon either.
This was in sharp contrast to the mood in the City in recent weeks. News of a pick-up in overseas orders and a report by the National Institute of Economic and Social Research that the economy stopped shrinking in April had raised hopes that we’d turned a corner. As Bedlam Asset Management noted, we’ve reached the strange point in the recession where dire data is treated as “good” because the expectation was for a death rattle.
Take the reaction to the awful jobless figures that emerged this week. News that unemployment had risen to 7.1% was dismissed in favour of focusing on a more modest rise in the number claiming benefits. The truth is that the number of UK unemployed jumped by almost a quarter of a million in the first three months of this year. As Ian King pointed out in The Times, “that’s the fastest three-monthly increase since 1981, the year when The Specials released Ghost Town – a haunting commentary on unemployment that formed the soundtrack for inner-city riots that year”.
We’re not ready for recovery
The truth is the basic market conditions are still not in place for a recovery. Massive debt imbalances have yet to be unwound. The financial sector remains fragile and banks are showing little enthusiasm for resuming bank lending. The rebuilding of personal savings will put a serious drag on spending, especially if housing and other asset prices fall further, said Capital Economics. And if the price of oil continues to escalate, the pressure on household budgets will mount, said Nils Pratley in The Guardian.
There’s much speculation about the shape of the recovery: will it be U, V or W-shaped? But whatever letter of the alphabet, it will take a long time to play out, said Capital Economics. Even in the mild early-1990s downturn it took nine quarters after the trough before annual growth picked up. And “if anything, the lingering effects of the financial crisis and credit crunch threaten to make this downturn longer than normal”.