By: Dr. Mike Campbell
With a whimper, the UK has slipped back into recession, fulfilling prophecies of a double-dip recession. Q1 2012 saw the UK economy contract by 0.2%, following on from a Q4 2011 contraction of 0.3% - two consecutive quarters of contraction is defined as being a (technical) recession. Economics is a cyclical beast with a recession always ending a period of sustained growth. On the bright side, this means we can look forward to a future upturn; the only question is when. In a typical cycle, the growth phase that follows a recessionary period is usual quite strong with investment and employment surging ahead. In the case of the Global Financial Crisis, this hasn’t happened (yet) although the end of the recession, per se, was in 2009 (this was defined as the first quarter of actual growth which is why it may come as a shock that we have been “in growth” for three years – you just didn’t notice!).
The Global Financial Crisis was the deepest and most sustained recession since the Great Depression of the 1930s – that episode dragged on for a decade. In common with the Great Depression, the Global Financial Crisis has seen a fundamental re-assessing of the financial system and doubts about its ability to function well for society: few people doubt that it functions brilliantly for financiers, of course. This meant that major economic powers around the world acted to support the financial system, pumping trillions of Dollars into the global economy to boost confidence, keep the world’s financial engine from ceasing and, it was hoped, boost economic activity. Some analysts cautioned that this “cardiac massage” of the system would not produce real, substantial growth but just froth making a double-dip recession all but inevitable. Some suggested that round two of the recession would be worse than the pain experienced on the first time around, but indicators so far this year tend to suggest that it won’t be so.
The proponents of the double-dip were arguing that the financial system needed a fundamental reform and overhaul. Only when this had been achieved could true, “organic” growth be attained, they insisted. Lack of investor confidence with the system has certainly hampered the recovery and was largely the driver behind the sovereign debt crisis. Governments have realised that large budget deficits cannot be sustained and have initiated ambitious austerity budgets to redress the shortfall. The problem with this is that spending cuts by central governments tend to stifle economic growth, a problem which is now concentrating the minds of our political leaders.