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Wednesday, 10 June 2009

Is a UK economic recovery in sight?

The first monthly increase in manufacturing output since early 2008 has re-ignited the debate about the green shoots of recovery. Economists, even at the gloomier end of the spectrum, are dusting down and reworking previous forecasts.

The Office for National Statistics said that manufacturers increased output by 0.2% in both March and April. Overall industrial production, including energy, also went up by 0.2%.

The figures suggest that the process of destocking is near to completion. Having run down their stocks of finished goods, factories have raised production in order to sell to customers. The weakness of the pound at the end of last year has helped too.

After encouraging signs from purchasing managers' surveys from services and construction, and more positive noises from the housing market, the manufacturing figures have added to the sense that the British economy is on the turn.

What remains highly uncertain is the pace or trajectory of any recovery.

Over the worst?

The respected National Institute of Economic and Social Research (NIESR) says it believes output across the economy rose in April and May. It argues that March saw the "trough" of the depression.

What seems close to consensus is that the slump in economic output forecast for this year will not be as bad as it looked a month or so ago

From that judgement, the NIESR goes on to suggest that output performance in the second quarter will be considerably better than in the first, which saw a decline of 1.9%.

"I am expecting a change relative to the first quarter of close to zero, it could be slightly positive or slightly negative," says the NIESR's Martin Weale.

"But I certainly expect the official figures to show either that the recession is over or that it is close to over".

Mr Weale points out that monthly figures are inevitably erratic, but the data in the economy are consistent with a picture of stabilisation across the economy. In essence he is saying that the worst is over.

Recovery debate

Thus far, signs of recovery may be discernible. But, even more so than usual, there needs to be a strong health warning.

Whether output falls a bit or grows slightly in the second quarter of this year the best description of activity will be "flat". The economy will be bumping along the bottom or just above it.

Predicting the path of the economy through the second half of 2009 and early 2010 will be a dangerous game.

The proponents of the "V-shape" recovery will argue that today's developments strengthen their case.

Those who see a "W-shape" scenario unfolding will stick with that belief.

What seems close to consensus is that the slump in economic output forecast for this year will not be as bad as it looked a month or so ago.

More independent economists are coming round to the view that the chancellor's forecast of a fall of 3.5% over the whole of this year, with a recovery beginning towards the end of the year, is perfectly feasible.

Extracted from BBC
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