Recession Watch: public sector cuts will stunt recovery

by Ed Bowsher on 18 June 2009  |  5 comments
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Job cuts in the public sector will hold the economy back.

Watching the economy at the moment is fascinating. We've been through a terrible financial crisis when many people feared economic Armageddon. It's now pretty clear that Armageddon isn't going to happen but it's far from clear whether the recession is gradually coming to an end.

My basic position over the last few months has been pretty gloomy. I don't think we're going to see a serious recovery in 2009 and I suspect that any growth we do see over the next few years will be pretty sluggish.

I admit that some recent green shoots did make me a bit more optimistic - especially this week's higher than expected inflation numbers.

But over the last 24 hours I've gone back to square one in the gloom stakes.  Two interesting snippets of information have helped to push me back to my default position.

First, an interesting opinion from a pundit called John Philpott. He's the chief economist at the Chartered of Institute of Personnel and Development (CIPD). Phipott warned this week that even if the private sector does start growing again, the public sector will inevitably contract as the government struggles to get its finances under control.

Don't forget, the public sector employs 20% of the UK workforce and Philpott predicts that 350,000 public sector workers could lose their jobs over the next five years. Those redundant workers will have less cash to spend in the shops and that, in turn, will damage the growth prospects for private sector businesses.

The second interesting snippet comes from Melanie Bien, a broker at Savills Private Finance. She commented in Guardian Money today on the mortgage market for first-time buyers. Yes, there are now mortgage deals available where first-time buyers only need a 10% deposit. But Bien said that credit scoring on these deals is incredibly high.

"Even if the buyer can get the deposit together there is every chance their application will still be rejected," said Bien.

If first-time buyers can't get the finance to buy homes, I can't see house prices rising by much. And if house prices stay static or fall, consumer confidence probably won't move up much either. If the consumer isn't spending, it's much harder for an economy to recover.

Check out more of my blog posts. This week I've written about Bing versus Google, getting a 7% real return on your cash, and more!