UK: When will the downturn turn up? (2 of 2)

UK: When will the downturn turn up? (2 of 2) - Are there other features about the economy which will prolong this recession? One positive aspect is that, without doubt, business is better managed and better equipped than it was in 1974-75 and 1980-81. Th

by
Last Updated: 31 Aug 2010

Are there other features about the economy which will prolong this recession? One positive aspect is that, without doubt, business is better managed and better equipped than it was in 1974-75 and 1980-81. Thus when demand recovers, companies should be able to supply. But the company sector is also heavily overborrowed, and the banks are keen to reduce their exposure, creating the well known spectre of the credit crunch. At the gloomiest end of the scale, one could see Britain's company sector as today's equivalent of the Latin American debtor nations of the 1980s. Like those countries, for many companies years of austerity may be needed to get their borrowing back into shape. This may overstate the danger, but a danger it clearly is.

My own guess is that, notwithstanding the risks, the recession will come to an end in a technical sense before the end of this year. How soon it does so, and how robust the subsequent recovery, depends very much on the interaction between falling inflation, lower interest rates and a revival in business confidence.

Even then it will take time before the recovery message gets home. Some readers will not need reminding, particularly if they are in property or certain areas of retailing, that their sectors have been in recession for two years or more. They may lead the economy into recovery but for others, who hit the buffers much later, the pick-up in activity could be much longer arriving. There is also the problem of the so-called lagging indicators of the cycle, notably unemployment. The long upswing of 1981-88 had been running for five years before unemployment turned down. This time the jobless total is likely to go on rising for at least 12 months after the economy has turned. So too, to end on a gloomy note, will the number of business failures.

(David Smith is economics editor of The Sunday Times.)

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today