UK Recession - Deep Very Deep

The latest set of macroeconomic indicators for the UK show the steepest quarterly decline in national output for over fifty years. GDP in real terms in the first quarter of 2009 fell by 2.4 per cent compared with the previous quarter driven lower by an especially weak construction sector. Construction output fell 6.9 per cent compared with a fall of 5.0 per cent in the previous quarter. The wider measure of industrial production was 5.1% down on the quarter and capital spending fell 7.5 per cent and is now 13.2 per cent below the first quarter of 2008.

The picture from the revised national income data is of a recession that started sooner than first thought (in the early months of 2009) and which has been deeper than forecast. Consumption is down but so too is the household savings ratio because of the fall in real disposable income. Exports have been hit by global recession and the weakness of demand for goods and services has caused a huge fall in investment spending. Businesses have been cutting back on stocks (in technical jargon this is an inventory adjustment) and supply chain industries across the economy have felt the backlash.

The new data doesn’t change the broadly held view that this recession is on a par with the early 1980s but that some stabilisation is likely through the enromous macro policy stimulus that has been applied to the UK over the last year. The stimulus - in the form of increased government borrowing, lower interest rates, quantitative easing and a more competition exchange rate - really only started in earnest once the economy was already in recession. Given the uncertain nature of the time lags and the fiscal multipliers we may not start to see widespread evidence of its impact until the final quarter of 2009.

Hugh Pym (fresh from his escapade in the shooting incident in London last week) is on good form in explaining the hit that the construction sector has taken