It’s good news that the rate of decline is slowing. It makes sense for the government’s spin doctors to be trying to inject some confidence, claiming that we are at the bottom, or near the turn. No-one sensible wants the downturn to go on for a day longer, and none of us want to see unemployment climbing sharply.
It’s important, however, to maintain some sense of reality. In recent months there have been two big changes that have led to the current change of mood. The first is, that on both sides of the Atlantic they have been printing money, which has found its way into markets for riskier assets. This has generated some more favourable comment, and given some investors and speculators some hope. The second is, that the new Administration in the USA has moved from criticising the Bush legacy to talking up the Obama measures. In the UK the Chancellor has shifted from talking things down to a more neutral position.
There are several difficulties ahead. I have commented before on the problems they face when taking the economy off the monetary drip of quantitative easing. Unemployment is likely to go on rising, even if this is the bottom of the output figures, let alone if it is not. Most forecasters in the UK assume unemployment will go up to 3 million. At some point the public sector has to stop expanding its workforce, as part of the measures to cut the deficit. That will on its own make quite an impact on unemployment numbers. The public sector has created many of the extra jobs in recent years. If the public sector attempts to raise its productivity at anything like the rate that is common in industry, then there will be a furher impact on public sector employment numbers.
UK consumption will be affected by the future increases in interest rates which will be necessary to create more normal banking and monetary conditions,and to curb future inflation. A lot of present spending on goods and services by individuals has been made possible by substantial mortgage interest rate cuts. There is still a pressing need for many people and companies to repay debt, against the background of weak banks and the need to calm down after the credit binge of 2003-7.
The reality ahead will be much slower growth. There remains the need to adjust to curb the twin deficits. We have to export more and consume less to curb the balance of payments deficit, still very wide in the UK. We need the public sector to spend less to curb the public deficit. We need both individuals and the public sector to borrow less, as part of the move to live within our means. It is going to feel like recession as the squeeze intensifies, even if output is rising.