Fresh downturn may be be nearer than expected

30th September 2010

Doubts are growing about the world economy being able to sustain long-term growth in the wake of the longest and deepest post- war recession, with one economist warning the next downturn may be ‘closer than expected’.

The emergence of the world economy from the ‘Great Recession’ should ideally lead to an extended period of expansion.  With past recessions, most notably those in the 1980s and 1990s, that is precisely what happened, with lots of spare capacity allowing growth without inflation.

Keith Wade, chief economist at Schroders, however, is worried that while it appears there is ample capacity for the economy to grow today, an extended cycle of expansion may well not develop.

He says: “Concerns about structural unemployment and the growth of demand suggest we are in for a shorter, more volatile expansion. Constraints on fiscal and monetary policy indicate that the scope for countercyclical policy is limited.”

Schroders continues to forecast growth for the rest of this year and 2011 but warns that “the next recession may be closer than expected”.

Wade adds: “With the Federal Reserve now becoming concerned about inflation being too low, the tightening cycle, when it comes, could be very short lived.

On the domestic front, all eyes remain firmly fixed on the Comprehensive Spending Review (CSR), due October 20. A major concern is the impact on unemployment of  heavy cuts in the public sector that have been flagged by the government.

Ministers are counting on the private sector to come to the rescue and absorb public sector job losses, which the Office of Budget Responsibility forecasts at 490,000 by 2014.

Analysis by Azad Zangana, European Economist at Schroder, offers some hope to ministers. His analysis suggests that the private sector can indeed create enough jobs, not only to cover the public sector job cuts, but also to ensure unemployment falls over the coming years.

 Zangana says: “Falling unemployment means increased incomes for the household sector overall, which should support private consumption growth.”

Zangana, however, is maintaining his forecast of a sub-trend UK recovery characterised by households holding back spending as they continue to deleverage, and struggle to access new credit.

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