The recession isn't over

by Ed Bowsher on 23 October 2009  |  2 comments
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Today's economic numbers were much worse than expected. They show the Tories are wrong to plan to cut public spending immediately.

The recession isn't over. Gross Domestic Product (GDP) - which measures the UK economy's output - fell by 0.4% in the three months to September. That's much, much, worse than forecast. Economists were expecting a 0.2% rise, according to a survey by Bloomberg. 

Today's news just confirms my belief that we're not going to see big increases in the base rate any time soon. Quantitative easing may well continue beyond November. A struggling economy has plenty of spare capacity, so when demand does pick up, businesses will be able to increase output without significant price rises. So I think a big spike in inflation in 2010 looks very unlikely. 

Of course, today's news doesn't just affect interest rates and inflation. It also has implications for tax and spending. If the economy is in recession, tax revenue will inevitably stay low and government spending will stay high. The government's deficit will continue to be appallingly bad. 

So with a big deficit, you might think I'd agree with George Osborne - government expenditure should be cut as soon as possible. But I don't. Public expenditure cuts in summer 2010 will only makes thing worse. They will clobber any signs of recovery, and tax revenues will be lower than they would otherwise have been. Paradoxically, I think public expenditure cuts in 2010 could end up increasing the government's overall debt.

We shouldn't be thinking about tax rises or public expenditure cuts until 2011. Maybe even 2012. If a patient is very weak, surgery can sometimes do more harm than good.....

> Check out more of my blog posts

> See what I said about the recession in the summer in our 'truth about the recession' video. I was pretty gloomy back then. If anything, I'm even gloomier now!