Economic Update: December 2009 Joe Nellis Steve Macaulay During 2009 we seem to have been permanently on storm watch. Now, this is the last economic update of 2009 into 2010. Joining me today, as usual, is Professor Joe Nellis. Now Joe, can we step down from storm watch? Joe Nellis I wouldn’t step down just yet. We are at a turning point and this has been, as you said, a difficult year. It has been probably as difficult as we expected. I think the surprise has been that the turning point has been slower in coming. So I wouldn’t step down just yet. Remember from peak to trough, this economy has shrunk by around 6%; that is the biggest drop since official records began. It is also the longest recession since records began in 1955. So no, it is too early to stand down. A cautious optimism is all I would recommend at the moment. Steve Macaulay Now some people are saying that this crisis has been like no other – is that so? Joe Nellis Absolutely true, in the UK that is. Japan has gone through a similar crisis over the last two decades. In other words the difference is this is a financially driven crisis, not a normal business cycle. And because it is financially driven, that is the blood of the economy and that blood is still not flowing to use the analogy we have used in the past. So this is a special one, and it will be some time before we can put this behind us. And I think that next year we will see a recovery, but it will still be a testing year. Steve Macaulay So let’s unpack that a bit more. 2010, what are the key elements that you would look for to see whether things are getting better or worse? Joe Nellis Well first of all, the headline figure – GDP growth. The fourth quarter figure will come out in about six week’s time. We are expecting surely that that will be positive, very small positive. So for 2010 as a whole, perhaps the consensus for the year – and I use that very carefully – is growth of about 1% for the year as a whole. Now that is in contrast to the Treasury’s own forecast which is 1.5%. But the Treasury has been wrong so far. And so if we take theirs as the optimistic scenario and 1% as the perhaps realistic scenario; we will be somewhere round about that figure, I presume. Knowledge Interchange Online© Cranfield University December 2009 1 Professor Joe Nellis
The other headline figures you mention: inflation. We are going to see inflation jump up in the next one, two, three months, but not to be concerned. That is purely a statistical blip as a result of high oil prices now compared to 12 months ago and as that works through the system it averages upwards. So inflation on a trend basis is going to remain under control for the next year or so as well. The other headline grabbing issue of course is unemployment. The good news is it is rising more slowly than we had anticipated perhaps six months ago, but it is still rising and it will reach perhaps 2.7–2.8 million before it peaks at the end of the year. So three big figures: GDP, 1%; inflation, under control between 1 and 2%; unemployment heading towards 2.7‐2.8 million, but maybe not the 3 million that we forecast earlier in the year. Steve Macaulay Now storms leave lots of damage; patients when they have gone through some severe trauma have some nasty scars. What are we left with? Joe Nellis We are left with quite a few scars – almost too many to list here. But of course the biggest scar of all is this debt overhang. Debt – personal sector debt, corporate debt, but perhaps most importantly government debt. There are two aspects of that; there is the annual borrowing which is going to head towards 13% of GDP this year alone ‐ £178 billion borrowed by this government to balance the books. But of course that adds to the national debt, the gross public debt. And that is going to head upwards year by year, perhaps to 80% of GDP. Let’s put that in context. That is not as bad as some countries such as Greece and Ireland and Italy, but it is bad by our standards. So the biggest scar will be the debt overhang which will take many years to pay back. There are other scars of course, and I think perhaps the biggest one is the damage that has been done to our trust in the banking sector. And I wonder how long that will take to recover, if ever. As I said this is a financially driven recession and it is not over yet. So perhaps a third scar is almost the fear of a return of this crisis. So lack of trust, fear and debt. They would be my three priorities. Steve Macaulay So finally, what is the watchword for 2010? Joe Nellis Well sadly it is going to be save; be cautious. And that is not good news for the economy. Recovery requires sustained increase in spending by the consumer. We said that many times. But I still © Cranfield University December 2009 2 Professor Joe Nellis
think that this year is a year for caution. I think consumers and companies are going to be very careful about how much they spend until they are confident that we are out of this recession. And as I say, that will not happen, I believe, until towards the middle to the end part of 2010 and hopefully 2011 will see us smiling again. Steve Macaulay © Cranfield University Joe, thank you. December 2009 3