4 Conditions needed for recovery

Eric Daniels, the Chief Executive of Lloyds Banking Group, writes in The Times today about the conditions needed to allow the economy to recover this year and next. He identifies three possible scenarios – strong recovery throughout 2010 and 2011, in line with Pre-Budget Report predictions and the Bank of England’s Inflation Report, with growth achieving up to 3% by the end of 2011. Or, more gentle recovery through this year followed by sluggish growth, which he says is consistent with recovery after a financial crisis – this reflects the expectations of Lloyds analysts. Finally the worst-cast scenario – fragile consumer and business confidence causing a double-dip recession, continuing lack of investment and growing unemployment preventing recovery this year.

His analysis suggests that if we are to have the best chance of achieving the first of these, four conditions need to be in place.
- First, consumer confidence needs to allow the ‘heavily-indebted household sector’ to spend rather than save, and in this he takes comfort from figures showing that the value of total credit and debit card spending by Lloyds customers was up by nearly 5 per cent in December on a year earlier.
- Second, business confidence and investment – he suggests that businesses have avoided major failures in the last year by cutting investment plans and running down stocks, thereby reducing their reliance on external credit, but the crucial point now is whether they have a gentle climate in which to re-invest.
- Third, fiscal policy. The inevitable cuts in public spending will weaken AD as higher taxes will hit consumer spending. He says that last two recessions were both followed by significant fiscal tightening, but that didn’t prevent several subsequent years of above-trend growth. However, are the global conditions likely to allow that to happen this time?
- Finally the strength of the banking and finance sector – here he suggests that the sector has consolidated sufficiently in the last year to allow it to supply the increase in credit demand which will fuel the recovery.

His conclusion is that the vital role of consumer and business confidence depends on the timing of the tightening of fiscal policy – too soon and green shoots will be starved of oxygen and die off, too slow and the burden of public debt will crush any attempt at growth. But he doesn’t offer any specific timetable – that he leaves to the politicians!