UK: Worse lies ahead

- "The economic and financial crisis of 2007-2008 triggered a deep recession in the UK. In 2009, GDP contracted by 4.9%, its sharpest post-war decline (see Chart 1). The British economy is emerging only very slowly from this recession, and is lagging about three months behind its main trade partners, the euro zone and the USA (Chart 2). In the fourth quarter of 2009, GDP grew by 0.4% q/q, after six straight quarters of contraction. By way of comparison, the 1973-74 recession in the UK lasted “only” three quarters and those in 1980 and 1990 both lasted five quarters (see Chart 3). Moreover, the main reason for the recovery in activity in the fourth quarter of 2009 lay in the slowdown in the reduction in inventories, with change in inventory accounting for GDP growth of 0.5 of a percentage point in that period. The acceleration of economic activity in the first half of 2010 (+0.7% q/q) came mainly from the strength of the manufacturing sector, the inventory cycle and global demand. However, the scale of the recession in 2008 is holding back recovery. According to the latest forecasts from the Bank of England’s Monetary Policy Committee given in its May 2010 Inflation Report, over the next three years production is likely to remain below the level it would have been but for the recession. On this point, estimates of the loss of production vary according to the model used. Thus the IMF 1 puts the average loss of production relative to the average trend at 10%, whilst the OECD2 expects a smaller fall, at around 2%. Meanwhile the Institute for Fiscal Studies3 puts the figure at around 7.5%, with the Treasury making a more conservative estimate of -5%. It is true that the contraction of the economy tends to be deeper and longer when it is accompanied by a financial crisis. Thus the fall in production is about twice the size after a financial crisis than in a standard recession."

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