(Very) Tentative Green Shoots

This summer you can expect many column inches devoted to searching for green shoots of economic recovery. There must come a time when the unprecedented policy stimulus applied to the UK economy will start to bear fruit and evidence emerges of a turning point in the business cycle.

Cautioning against false dawns

Inevitably the scale and complexity of the financial and economic crisis means that signs of a rebound in business and consumer sentiment and a rebound in genuine measures of economic activity will have to be taken with caution. We should beware of reading anything concrete into a single month’s data on any relevant economic indicator. Moving averages are a better - though flawed - guide to turning points.

Watch out too for indicators that on the surface herald an improvement in activity but eventually turn out to be ‘dead cat bounces’!

When recovery does emerge it will probably come in this order:

1/ Lending conditions - e.g. availability of credit, lending criteria

2/ Pricing data e.g. pressures on businesses to raise prices / costs etc

3/ Real economic data - output, investment, new housing starts, export volumes

I have chosen four indicators that might (repeat might) just be close to a turning point

First - sentiment in the UK construction industry which nosedived last year but seems to be flattening out (albeit from a very low level)

Second consumer sentiment - not just about people’s perceptions of their own financial circumstances, but also for the economy as a whole and whether now is a good time to at least consider making a new purchase such as a car or kitchen appliance

Third the seasonally adjusted number of new mortgage approvals

Fourth the annual growth of retail sales (measured at constant prices and expressed in like-for-like terms i.e. adjusting for changes in the amount of retail space caused by the opening of new and enlargement of existing retail outlets. Are there modest signs here that consumers are keeping up their spending as mortgage rates have fallen and the temporary VAT cut has had some impact?

Please don’t get me wrong! This recession still has a painful distance to travel and it would be remarkable if the slashing of interest rates, a 25% depreciation of sterling and an eye-wateringly large budget deficit did not have some impact on the economy. Most of the macro policy stimulus came in the final six months of 2008 - so 6-9 months on we would expect some of the natural time lags of monetary and fiscal policy to be working their way through.