The Recession Will Be ‘W’ Shaped

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.

And So It Begins

But more time for drinking with less money surely equals more Lidl Finkbrau? Bloody students...

With the news that Business, Innovation and Skills Department (including Universities, but without telling everyone Universities are included) is slashing £65m off budgets for next year, it’s pretty clear that you don’t need a Budget to economise.

And the even more telling part of this story? The fact that it is Lord Mandelson’s very own department that is wielding the axe.

I’ve no doubt we’re going to see more and more stories of this nature as the months go by. Perhaps even slipped out over the summer while they hope no one’s watching. It’s possible that this could lead to yet another death by a thousand cuts to the government. More likely though, they’re hoping that people aren’t likely to notice a little cut here, a little cut there, and particularly if they are not in areas that are going to hit the headlines.

Rather that than in next year’s budget issuing huge climb downs over growth forecasts (cos that one’s not looking too good either, Alistair) – literally weeks before a General Election – and being forced to drastically cut departmental budgets because they were a little too optimistic compared with last year. Either that or increase borrowing still further: surely suicidal in the run up to Voting Day as it would play right into the Tories hands.

But it is surely a sign that the government has accepted that overall expenditure must come down in cash terms, not just in real terms.

Or is it? After all, they only yesterday told us that they have £1bn to spend on electrifying railway tracks. An idea I support; and one that fits properly into Keynesian economic theory (infrastructure investment) – but I can’t help but feel that this is what should have been done instead of useless VAT cuts.

Or perhaps this all hints at another strategy. Could the election actually be called before the next budget? Labour, knowing defeat is inevitable, may decide it’s better to make the Tories be the ones who take the potentially unpopular decisions of cutting budgets and raising taxes. Because, make no doubt about it, taxes will have to go up somewhere. Reducing spending simply won’t be enough if we’re to service this mountain of debt we’re building up.

That strategy, perhaps seeing an election in March, may be the one that hopes for a Tory victory, a very small one in a hung Parliament, and then hoping they fail to deliver, leading to a second General Election within the year – one which could see Labour returned to power.

All a little far fetched, maybe. But you never know what Mandy’s up to. And all this on top of previous news freezing student loans, he’s clearly picked this fight with the Universities because he thinks it’s one he can win…

All we need now is for Gordon Brown to emerge telling us that spending won’t be cut, that white is black and night is day and David Cameron is a jolly nice chap, really.