Recovery will be sluggish

by Ed Bowsher on 15 May 2009  |  4 comments
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The economy will eventually recover. But it will be a slow, sluggish recovery. It’ll be a long time before we have another economic boom.

The economy will eventually recover. But it will be a slow, sluggish recovery. It'll be a long time before we have another economic boom.

The Bank of England published its latest inflation report this week which suggested the UK economy may start to recover in late 2009/early 2010. I think that's a reasonable 'best guess' but that's all a pundit can say at this stage. We live in extraordinary times and it would be foolish to make a firm prediction about when growth will return.

However, I'm more confident when it comes to predicting the type of economic recovery we're going to have. I'm convinced it will be a slow, sluggish recovery. In the UK, we may see economic growth of 1 or 2% in 2010, but I suspect it will be several more years before we see economic growth of 3% or higher.

Here are three reasons:

• Yes, the banks are now more stable than they were six months ago. Bankruptcies look unlikely. But most banks' balance sheets are still weak. They don't have the capital to start lending aggressively again. That makes it harder for businesses to invest and grow, and consumers will have less money to spend.
• Most of us have been deeply shocked by the events of the last year. As a result, I think many consumers will want to build a financial cushion so they can withstand future shocks. That means people will save more and buy less. Saving is good for the long-term health of the economy, but we won't get an economic boom anytime soon if people aren't spending at the shops.
• The government's finances are also in terrible shape. As soon as the economy gets a bit stronger, Alistair Darling (or his successor) will start increasing taxes and/or cutting public expenditure. Both measures will reduce demand in the economy and constrain growth. 

Clearly growth of 1 or 2% a year is better than recession. However, unemployment probably wouldn't fall by much in a sluggish environment, and it would be hard to do anything about poverty or increase spending on the NHS or education. 

Then, of course, there's the nightmare scenario: a stagnant economy combined with high inflation. But that's for another post....