IOD: One L of a recovery lies ahead for British economy
WEAK growth over the coming quarters will produce an L-shaped recovery in Britain, according the latest economic forecasts from the Institute of Directors (IOD).
The IOD estimates that the British economy will only manage to grow by 0.9 per cent in 2010 and then by 1.8 per cent in 2011. This is weaker than the Office for Budget Responsibility’s (OBR) forecasts, which put growth at 1.2 per cent and then 2.3 per cent.
In the forecast, Graeme Leach, chief economist at the IoD, cited eight factors that might cause “one L of a recovery”. These include a slightly higher savings ratio, weak housing inflation, a smaller output gap than currently thought, an uncertain outlook for exports and the lack of oomph from falling rates.
He said: “After a very abnormal recession it would be foolish to rule out the possibility of a very abnormal recovery as well.”
He explained: “A whole host of reasons support the idea of one L of a recovery. One of the key reasons behind this forecast is the potential for further de-leveraging in the household sector and an upward movement in the savings ratio. The savings ratio has increased significantly but it is still well short of the level attained in the wake of previous recessions.”
The economic forecast also examined alternative recovery scenarios, such as a square root. “In this scenario we see an acceleration in GDP growth in the second half of 2010, which combines with sticky inflation to trigger an interest rate and/or QE reversal by the Bank of England,” Leach said.