WHILE the UK economy may have passed the absolute low point of this recession, any recovery is likely to be built on pretty fragile foundations. The key message from previous cycles is that, whatever their shape, full recoveries from UK recessions tend to take a long time.
Even in the V-shaped downturn of the late 80s to early 90s, it was nine quarters after the trough before annual growth returned to trend rates. And in all three of the most recent recessions, it took between two and three years after the economy started to expand again for the level of activity to return to its previous peak.
If anything, the lingering effects of the financial crisis and credit crunch threaten to make this downturn longer than normal. This has important implications for the outlook for inflation and for the timing and pace of any tightening of policy.
A look back at previous recessions underlines the likelihood that, whatever the precise shape of the upturn, the economy will take some time to recover fully. For now, our profile for growth most closely resembles a U, with annual GDP growth likely to remain close to its trough for the next few quarters even as the quarterly rate of contraction slows. We are still unconvinced that recent “green shoots” will translate into a return to robust economic growth next year.
Jonathan Loynes is chief European economist at Capital Economics.