The drip, drip, drip of double-dip

The drip, drip, drip of double-dip

When we hear talk about a ‘double-dip’ recession it’s important to ask what the commentator means by this and what they are saying will be the result.  For example, are they talking about the UK or the global economy?  For us it’s likely to be the UK they’re referring to; in which case a technical recession would have to be two consecutive quarters of negative GDP (Gross Domestic Product) growth.  Strictly speaking this should occur some time in 2011 if sensible logic is to apply to the term ‘double-dip’.

With the spending cuts announced in October this year likely to begin filtering through next year and VAT increasing in January to 20%, the UK may well feel like a very glum place for a number of years to come.  Already we are seeing slower consumer spending beginning to come through and the bumper 1.2% growth we witnessed for Q2 this year could prove to be a decade long high if some predictions are to be believed (Q3 GDP growth was 0.8%)*.

These factors alone, however, will struggle to pull the UK back intorecession while the global economy continues to post strong positive numbers.  More particularly, while the US and Western Europe maintain a state of economic recovery, as our major trading partners, so too will Britain stand a chance of achieving the private sector led economic growth the Coalition Government so desperately needs.

The US has committed to a further round of QE (quantative easing) and Europe looks to also need further stimulus measures in order to avoid a repeat of the Greek debt crisis earlier this year.  What price on Ireland needing EU money before the year is out? In the UK the BoE (Bank of England) looks to have been given a tacit instruction by government to ignore short term inflation and focus on economic growth and thus QE2 in the UK seems a distinct possibility.  Perhaps we are witnessing the future in terms of how government and central banks define their separate spheres, as legislatures increasingly force the executive branches of government to move towards a balanced budget, while central banks focus on inflation, setting interest rates and managing economic growth.

In truth, double-dip recessions are rare in developed economies and with the BoE open declaration of intent to keep monetary policy loose for sometime, a double-dip in the UK only seems likely if there is a further shock to the financial system causing a major downturn in consumer and business confidence.  Cuts to the public sector will no doubt continue to make the headlines and the resulting unemployment will very likely hit the housing market (even with the much talked about restricted supply).  The media will quite possibly draw parallels where possible with the 1970’s, but the world is a lot more globalised now and the UK has much more flexible labour rules (and a much smaller union membership), so any similarities are only going to be skin deep.

But perhaps it doesn’t really matter whether we have a double-diprecession or not.  We are told that we are now living in an ‘age of austerity’ and an age is never defined by statistics.  Rather people remember the feeling of the time; and whatever else, it seems likely that coming years will feel difficult for many in the UK.

*Source Office for National Statistics – November 2010