Page last updated at 11:43 GMT, Friday, 23 October 2009 12:43 UK

Head-to-head: When will recovery come?

Danny Gabay and Steven Bell
Danny Gabay (left) spars with fellow-economist Steven Bell

As figures confirm the longest UK recession on record, BBC News online brings together two economists with very different views, to debate when the recovery might start and what sort of recovery it will be.

Danny Gabay (left), from Fathom Consulting is a former Bank of England economist. Although he thinks things will get better, he reckons the recovery will be a long and painful process.

Whereas Steven Bell, chief economist at hedge fund GLC, is more optimistic.


The UK has had to endure its toughest recession since the 1950s. Can we now look forward to better times?

Danny Gabay: The answer is almost certainly yes.

Even if the economy continues to contract next year, which we think is a distinct possibility, it is highly unlikely to be anywhere near as bad as the period around the turn of the year, following the collapse of Lehman Brothers.

But unlike some, we do not see the collapse of Lehman Brothers as the cause of the global recession - the US had already been in recession for nearly a year and the UK for six months by then - but it was a major catalyst for spreading the weakness across the globe via the financial markets.

This context is important. The optimists today - which importantly does not include many central bankers - would have you believe that now that banks are making gargantuan profits again and stock prices are back to their pre-Lehman levels, all will be well.

Those who argued during the boom years that "this time is different" - the four most dangerous words in economics - are now arguing that "this recovery will be the same".

Steven Bell
The idea that the world in general and the UK in particular will struggle to achieve trend growth [the average sustainable growth rate] over the next few years is far too pessimistic
Steven Bell
Danny Gabay
The global imbalances that caused the recession are still very much in place and on some measures are actually widening. The seeds of the next lurch down are already being sown
Danny Gabay

In my view they are wrong. History does not repeat itself, but as someone once said, it certainly rhymes.

It teaches us that recessions due to financial or banking crises are deeper, last far longer and produce shallower recoveries. That is especially true if they are highly synchronised across the world, like the 1930s depression.

While we would all like to export our way out of trouble, we cannot of course all do that. Someone has to import, that is expand demand, for all that extra supply.

Steven Bell: I agree that every cycle is different. I agree that the recovery faces strong headwinds.

But the idea that the world in general and the UK in particular will struggle to achieve trend growth [the average sustainable growth rate] over the next few years is far too pessimistic.

As you concede, the severity of the downturn was exacerbated by the near-collapse of the global financial system.

But that risk has been averted and the recovery in global trade and production is V-shaped. In addition, the policy stimulus is massive.

UK IN RECESSION
recession logo
Figures released have shown the UK economy has entered its longest recession - six consecutive quarters - since records began in the 1950s.

BBC News is spending the day looking at the state of the of the economy across the UK and at what prospects there are for recovery.

Fiscal policy [like the VAT cut and the car scrappage scheme] has done its job, but even as it fades, monetary policy is gaining traction.

Capital markets have reopened, with massive corporate bond issuance in the first half of the year now giving way to buoyant equity issuance. Emerging markets are enjoying a boom and growth in the developed markets is accelerating.

The UK is benefiting from this improved environment with one important and powerful advantage: sterling has fallen by some 25% since the crisis began.

The benefits to tourism are already evident; exporters will be helped too. The lags for overall production are longer but the ultimate effect is even more powerful.

Economists have spent the last six months revising their near-term growth forecasts up. It's time they recognised that the world has changed.

The recovery is here and its real.

Danny Gabay: I think that is an excellent summary of all the positives out there.

But the whole is less than the sum of the parts. For example, take government schemes like cash-for-clunkers out, and the V-shaped recovery in production disappears.

And total financial collapse may have been averted, but at a heavy price.

I do not necessarily disagree that countries will reach trend growth in coming years, but that trend has fallen dramatically as a consequence of the crisis.

The OECD estimates that the trend rate of growth for the group as a whole is now close to 1% per annum.

It averaged more than 3% in the years before the crisis. If right, it says that the future might look like Japan's recent past.

Even government-sponsored growth is not a free lunch. Japan's net debt has tripled since 1990 to over 100% of GDP, the UK's and the US's will be there too in a year or two.

The comparison is not made lightly. Japan's problems emerged as it tried to recover from the bursting of two related asset price bubbles.

But the fundamental point is this. The global imbalances that caused the recession in the first place, are still very much in place and on some measures are actually widening. The seeds of the next lurch down are already being sown.

China may now be expanding by nearly 9%, according to their official data at least, but its expansion is being driven by investment and government spending, not by consumption and imports, which in fact are still falling. In other words, rather than providing an engine for demand, China is once again increasing supply.

While that remains the case, the global recession may simply be pausing for breath. 'V' is half a 'W'.

Steven Bell: I just don't see the relevance of your points about China and Japan.

You say that China is not an engine of growth because its recovery is based on investment rather than consumption and imports.

Hang on - that's exactly what we were lacking in the US-led expansion in the run-up to the crisis. Investment-led growth is obviously more sustainable.

And the ghost of Japan's lost decade in the 1990s does frighten policy makers and is one reason why they reacted as they did in this crisis. Japan took 13 years to sort out its banks. The US took 13 weeks. That's the difference.

And if trend growth is 1% and I'm right that demand picks up to a 3% or so pace, businesses will have to recruit more workers and unemployment would tumble.

We'll see.



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