Not your ordinary recession

Robert Ferguson, senior partner for KPMG in East Anglia, warns that, “green shoots” or not, this is no normal recession.Sentiment about the economic outlook has been extremely volatile this year.

Robert Ferguson, senior partner for KPMG in East Anglia, warns that, “green shoots” or not, this is no normal recession

SENTIMENT about the economic outlook has been extremely volatile this year.

After a very depressive winter, the mood swung dramatically in the spring. Rather than vying to outdo each other on gloom, we are now starting to see commentators compete on spotting “green shoots”. But is the talk of a possible imminent upturn justified?

There are really two questions here. Are we approaching the bottom of the recession? And what sort of recovery are we going to see?

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A bounce in the economy is on the cards at some point. Businesses were caught with excess inventories when demand for goods collapsed unexpectedly late last year, and consequently slashed production, supplying instead from existing stocks. But once these have been depleted, production will have to increase to meet new orders.

To date, evidence of green shoots is largely limited to surveys of business opinion rather than hard economic data, and so far they suggest only that the pace of deterioration may be slowing - things are still getting worse, but less quickly than before. Over the last quarter some positive research has been reported which demonstrates that East Anglia may also be heading towards a bounce-back from this recession. Research last month found that East Anglia was just one of two regions across the UK to produce growth in retail rents in the last quarter whilst a report by EEF (the manufacturers' organisation) last week also showed encouraging signs for the region's manufacturing firms - almost a quarter of businesses reported an increase in total new order volumes, while cash flows also showed a slight improvement. However, the report also warned that a full recovery remains some way off.

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Certainly, doubts remain with most commentators on how far any recovery will be sustained beyond this essentially technical rebound. It should be remembered that this is not a normal recession. Previous advanced economy recessions over the last 40 years have been essentially induced by the authorities reacting to economic overheating by hitting the brakes to subdue inflation, say, by raising interest rates or taxes. Once that job was done, policy makers could press the accelerator again.

The roots of this downturn are very different. It is a “balance sheet” recession where over-extended borrowers (whose asset prices are now collapsing) and undercapitalised lenders (faced with rising defaults on the loans they have made) try, or, in many cases, are forced, to rectify their finances. This will not be achieved overnight and could constrain demand growth for an extended period.

If demand does not strengthen - or in a worst case keeps falling - any stock-cycle induced bounce in production will quickly fizzle out. The jury is still out on whether we are looking at a “V” shaped recession and recovery, a “U”, a “W”, or even an “L”.

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