Recession obsession

Many fear that the UK is on the verge of slipping back into negative growth. Will Hodges takes a look at the facts

It's quite possible that the UK will suffer a recession this year. With the UK economy reportedly contracting by 0.2 per cent in the fourth quarter of 2011, a further dip during the first three months of this year would be enough to tip the scales. Current data points towards weak performance by the economy so far in 2012. Consumer spending, business confidence, exports and government expenditure are all down on a year-on-year basis, all of which is suggestive of negative growth.

What exactly is a recession?

Various descriptions of recession exist, but in economic terms it's officially categorised as two consecutive quarters (three-month periods) of negative GDP growth. This means that for a country to enter a recession its total economic output has to have fallen for a total of six months. It is therefore possible for an economy to suffer a recession over part of a year while still recording positive GDP growth over the full 12 months.

Why is the economy underperforming?

Economists have highlighted a number of reasons for the country's current economic malaise. The finger has been pointed at the government's ambitious debt-reduction programme, which aims to inflict £107 billion in cuts to public spending by 2015. Though believed to be a necessary tonic to ensure the UK's international creditworthiness, the cuts have led to job losses and wage freezes, which have had a knock-on effect throughout the economy. Meanwhile, the continued uncertainty surrounding the future of the eurozone continues to sap demand for exports from the country's largest trading partner, while also undermining the confidence of UK businesses, many of which are reluctant to expand or hire new staff until the crisis is resolved.

When will things improve?

While 2012 is unanimously expected to be a year of meagre economic growth, most forecasters expect a notable upturn in the UK's fiscal fortunes from 2013. The International Monetary Fund (IMF) predicts that the economy will grow by 2 per cent next year, while research firm Businesses Monitor International (BMI) is tabling a forecast of 1.7 per cent. These projections are contingent on a resolution to the eurozone debt crisis, however, and further chaos on the continent would surely have a negative impact on these shores.

Can anything be done?

When it comes to stimulating growth, the government and the Bank of England (BoE) have relatively few tools at their disposal. The main weapon in the BoE's armoury is the ability to reduce the cost of borrowing throughout the economy by lowering the base rate of interest. With interest rates already at a record low of 0.5 per cent, however, it has little room for manoeuvre. Its other option is to introduce another round of quantitative easing (pumping money into the economy by buying up government bonds). Though this is expensive and has enjoyed limited success in the past, the BoE has announced plans to inject a further £50 billion into the economy. A more radical step would be for the government to suspend its spending cuts programme in order to stimulate the economy. However, Chancellor George Osborne has stated that there can be no question of this happening while the government remains committed to reaching its debt reduction target by 2015.

UK recessions since 1930

The Great Depression (1930-1931)

The fall out from the Wall Street Crash of 1929 had a devastating impact this side of the pond with the UK suffering two consecutive years of negative growth, including a 5.1 per cent contraction in GDP in1931.

Mid-1970s recession (1973-1975)

A period best forgotten in the UK's economic history, which saw the country's GDP contract by a total of 3.9 per cent over two years. The Arab oil crisis (Arab states held an embargo on oil exports to the West, stifling industrial growth) and the country's general decline following the break-up of the British Empire were seen as contributing factors. While growth returned in 1975, worse was yet to come with hyperinflation and a growing public debt forcing Jim Callaghan's Labour government to turn to the IMF for a financial hand-out in 1976.

Early 1980s recession (1980-1982)

Margaret Thatcher suffered one of her toughest periods in office as the economy shrunk by 5.9 per cent over two years. The contraction was largely the result of Thatcher's tough measures to re-shape the UK economy following the malaise of the 1970s. A trying period for the economy also saw unemployment levels rise to 12 per cent during1985.

Early 1990s recession (1990-1992)

Although relatively mild in historical terms (the economy contracted by 2.5 per cent over a two-year period), the UK's recession at the beginning of the 1990s had a lasting effect on the labour market with 10.7 per cent of Britons finding themselves out of work in 1993. The country's economic stagnation paved the way for Tony Blair's Labour Party to win a landslide election in 1997.

Late 2000s recession (2008-2009)

It may seem hard to believe, but the past few years have seen the UK in the worst period for economic growth in living memory with the economy shrinking by a total of 6.4 per cent over an horrific 18-month period. The US sub-prime crisis and subsequent global financial collapse created a perfect storm of events from which the UK has yet to fully recover. To put it into perspective, in 2004 the UK was officially the world's fourth largest economy. It now finds itself in seventh place, having been overtaken by China, France and Brazil during the course of the crisis.