AS Macro Key Term: Economic Recovery

A recovery occurs when real national output picks up from the trough reached at the low point of the recession. The pace of recovery depends in part on how quickly AD starts to rise after a downturn. And, the extent to which producers raise output and rebuild their stock levels in anticipation of a rise in demand. The state of business confidence plays a key role here. Any recovery in production might be subdued if businesses anticipate that a recovery will be only temporary or weak in scale.

n economic recovery might follow a deliberate attempt to stimulate demand using macroeconomic policies. In the case of the UK in 2009-2010 a number of strategies were used to boost confidence and demand and prevent the recession turning into a damaging depression:

1. Cuts in interest rates – the policy interest rate fell to 0.5% in the Autumn of 2008 and they have stayed at this low level ever since
2. A rise in government borrowing – the budget deficit rose above £150bn in 2009 and in 2010 and government borrowing is likely to remain high for some time to come
3. A policy of quantitative easing (QE) by the Bank of England to pump more money into the banking system in a bid to increase the supply of loans - now worth over £200bn
4. A temporary cut in the standard rate of VAT from 17.5% to 15% (now reversed – indeed VAT rose to 20% in 2011)
5. The launch of a car scrappage scheme for older cars worth up to £2000 per car and a consumer subsidy for households replacing their old boilers

A selection of charts relevant to the economic recovery phase in the business cycle

Consumer confidence

United Kingdom, Consumers - monthly data, Seasonally adjusted dat… from Timetric

Industrial production

United Kingdom from Timetric

Total employment

United Kingdom from Timetric