There has been much talk of green shoots in recent weeks with the more positive tone to a number of highly regarded surveys of the business community fuelling hopes that the recession is now over. By Simon Rubinsohn
That in part, of course, depends on how one defines a recession. Unemployment is set to continue rising for some time to come and may yet come close to the three million mark so for many households, this improvement in news flow will bring little good cheer.
The turnaround in the economy has, it is true, come through a little faster than envisaged but some meaningful response to the massive policy stimulus should not really be a surprise. It is not just that base rates remain at historic lows and the budget deficit has been allowed to balloon out to unprecedented levels; these measures have been supplemented by the bank bail-out, widespread loan guarantees and most latterly quantitative easing, that is direct purchases of government bonds by the Bank of England.
Nevertheless, big issues remain for policymakers. Take back the stimulus package too soon and fears will return of a relapse into a 1930s deflationary scenario. Leave the stimulus in place for too long and inflation could become a very real threat.
Significantly, there have also been some tentative signs that pace of contraction in the construction industry may be easing. Q1 data showed output down a hefty 9 per cent compared with the previous three month period taking the peak to trough drop to 16 per cent. Since then, however, the CIPS construction survey has begun to pick-up, although it is still at a level consistent with falling (rather than rising) output. Moreover the April data for construction orders showed new bookings to be at their best level since August last year. This firmer trend has been led by a modest pick up in private sector housing, albeit from abysmally depressed levels, and infrastructure.
With government capital spending programmes being brought forward and signs of a thaw in the willingness of lenders to help fund PFI projects, the rise in infrastructure orders is understandable and likely to persist. It is harder to see a material rebound in housing activity taking hold. Builders such as Taylor Wimpey and Barratt may be seeing their inventory gradually rundown but there appears little appetite for a return to large scale development programmes. The likelihood is that future residential projects will be orientated towards the more marketable, high value properties.
Meanwhile, private industrial and commercial development looks set to remain in the doldrums for a while to come. This suggests that it would be premature to assume construction sector has now reached a floor. Indeed, the loss in output for the industry looks likely to be somewhat greater in this downturn than during the recession of the early 1990s. It is worth recalling on that occasion, it subsequently took more than a decade to bring output back to its previous high. Whether the recovery process will be quite so prolonged this time around is open to debate but with public sector capital spending set to halve over the next four years, the omens are not encouraging.
Simon Rubinsohn is the chief economist for RICS