The Futility Monster

He'll pointlessly derive more enjoyment out of your resources than you

The Recession Will Be ‘W’ Shaped

Posted by The Futility Monster on November 12, 2009 @ 10:11

Here's something else that's W shaped. Thanks, George.

Here's something else that's W shaped. Thanks, George.

Much ink has been spilled over what letter or symbol is best used to describe what the recession will be like. Some have said it will be a V –  a sharp drop followed by a sharp increase. Or maybe it’ll be a U, a sharp drop, followed by a prolonged stagnation, followed by a sharp rise.

But the most depressing of all is the idea of a W shaped recession, which is basically two Vs put together: a sharp drop, followed by a sharp rise, but not one that recovers the loss… and then a similar decline on the other side, before a final recovery. Only the problem is that to return to the square one, at the very start of the W, takes a huge length of time.

So far, the recession has been very much a plunge into the V. Or a U. There is some sign that we have bottomed out… as the latest GDP figures suggested. Bank of England governor Mervyn King also reckons that the recovery has “only just started”.

But the question remains… is this a sustainable recovery, or is it just the eye of the storm?

To me, with the horrendous spending round that’s on the way starting next year, there can only be one answer.

This is going to get worse before it gets better.

The private sector recession has been well under way. The economy has collapsed by about 5% since the start of it. We’ve seen local and national businesses go bust. But the public sector has carried on regardless.

Of course, to us Keynesians, that’s not a problem. In fact, public sector spending is supposed to make up the slack when the private sector goes into retreat. That, along with more spending on unemployment benefit, is supposed to make sure the worst edges of the recession are smoothed sufficiently.

Which makes you think: if the government hadn’t been spending, just how much more of a dip would there have been beyond 5%?

And there is the problem. Because, from next year, the government is going to have to stop spending. We’ve heard of the scale of the bloodbath the Tories, the Lib Dems and even Labour are planning. There is going to have to be public sector wage restraint, if not job losses, and whole programmes are going to be removed. Others curtailed.

That retrenchment will exert a further downward pressure on GDP. That public sector recession will be what definitively brings home of the strain of the recession to most people. Because, let’s face it, a lot of people have done well out of this recession. Low interest rates, falling prices… for those who looked after their finances in the good years, didn’t live beyond their means, they’ve had a very good time.

That, in a nutshell, is why the Tory claim that Labour didn’t mend the roof while the sun is shining is so deadly. Every individual and family knows from their own finances that you can’t live beyond your means forever.

Which is exactly what the government has done. They have spent and spent and spent in the good years. Maybe a lot of it was necessary. But they haven’t been honest about how to pay for the increased spending on health and education. We can’t have European style public services on an American tax take.

And now all of that spending is going to have to stop.

Before the private sector recovery has properly begun. And how can a private sector recovery be sustained if millions of public sector workers are suddenly tightening their belts?

This period of uncertainty in the economy is far from over.

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3 Responses to “The Recession Will Be ‘W’ Shaped”

  1. Neil Craig said

    Of course “the recession” is different in different countries. In most of the world except the UK & US it is over, in China 7 India there was never anything approaching recession, mereely the growth rate falling to 8% annually.

    Of course British politicians could end our recession immediately if they wanted.

  2. […] it is a cast iron certainty that serious cuts in 2010/11 will indeed cause the W shaped recession I have long warned about. Even without them, it’s going to be a tight affair. The Q1 2010 GDP figures are going to […]

  3. […] In recent days I’ve been troubled by the cover the Lib Dems are being forced to give to the Tories for the “cuts now” agenda. In truth, I’m probably deeply unsure myself, having argued in the past that we do need to make mega cuts in budgets all over the place, before then saying that those very cuts would do serious damage. […]

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