After the storm

A more balanced recovery

Whisper it quietly but there are cautious grounds for believing that an economic recovery when it finally arrives might be more sustainable and balanced than the unbalanced expansion in the years running up to the recession. As in the years following our emergence from the slump of 1990-92, the British economy is likely to see a phase of growth which is less dependent on household consumption and government spending and where the export sector might lead the way. Even manufacturing industry - whose share of value added in national output has been on a long-term downward trajectory - may enjoy something of a renaissance.

Despite historically low interest rates and the short term relief of a decline in global food prices, household spending is likely to be subdued because of

Rising unemployment - the claimant count is set to rise above 2 million and the labour force survey measure above 3 million Households will have to continue paring back their debts and building up savings balances, especially those caught in the negative equity trap Many workers will experience wage freezes or pay cuts and disposable incomes will be hit by rising taxation and a fall in bonuses and overtime payments Credit will remain hard to come by - keep in mind that, dejavascript:promptTag(“link”);spite policy interest rates of 0.5%, unsecured interest rates on bank loans, overdrafts and on credit cards have become more expensive. Many banks have not passed on in full the effects of recent interest rate cuts It will take time for consumer confidence to rebound especially if there is a delayed and muted recovery in the housing market. Expectations and trust have taken a battering

In his latest Deloitte Economic Review Roger Bootle considers what shape a recovery might take.

The key to his analysis is the delayed effects of the 25-30 per cent depreciation of sterling on a trade weighted basis. The benefits of a more competitive exchange rate have been muted because of the downturn in global GDP and trade - falling real incomes and spending in our major export markets have outweighed the substitution effect of cheaper prices for British exported goods and services. But this turn round eventually.

Whilst financial services are likely to remain in the doldrums, Bootle points to other industries well placed to reap the rewards of a lower pound - tourism, biotechnology, education and health services, businesses serving large-scale environmental projects, architecture and advertising. These are areas in which we are well served and have a revealed competitive advantage to judge from the balance of payments statistics.

Higher exports and a pick up in capital investment - these are the twin pillars needed for balanced recovery after the storm.