Triple-dip recession still a possibility despite Q3 GDP growth warns Midland economist

THE UK faces the threat of an unprecedented ‘triple-dip’ recession despite latest figures showing the economy has officially grown out of recession, a Midland economist has warned.

Professor James Mitchell, of the Warwick Business School, said if the Olympic factor was stripped out of the latest data then there was a real danger the UK could back into recession for a third time as the economy remained in a very fragile state.

Official Gross Domestic Product (GDP) figures from the Office for National Statistics show the UK returned to growth last quarter with a positive 1%. Production output grew 1.1% and the service sector by 1.3%, although the construction sector continued to struggle showing a further decline of 2.5%.

However, Prof Mitchell said the figures could not hide the fact that the UK was currently suffering its longest lasting depression – worse than the Great Depression of the 1920s and 1930s.

He said: “The data does mean that the economy has technically come out of recession, but at least three one-off factors flatter this latest quarterly GDP figure: the Olympics and the second quarter’s extra bank holiday and bad weather.

 “If we strip out these three one-off factors then underlying growth in the UK remains flat and no higher than two years previously. The level of national income remains depressed below its pre-crisis 2007 level.

“On that basis we remain in the longest lasting ‘depression’ in living economic memory.”

He said the research undertaken at the business school indicated there was only around a one in three chance that economic growth for 2012, as a whole, was positive.

He warned the recession could leave lasting scars and when the country did finally recover it could mean the UK has to adjust to lower GDP growth being the new norm.

“These remain highly uncertain times,” said Prof Mitchell, who worked at the National Institute of Economic and Social Research for 12 years. “The economy is still bouncing along the bottom and so one cannot rule out the economy entering into a contraction again.

“We could well get a triple-dip recession, which is unprecedented. Fiscal austerity, higher energy prices, credit constraints and the on-going Euro crisis all present significant downside risks to the UK economy.”

 He said the puzzle over why output per worker remained stubbornly low coming out of remained, whereas in previous recessions it has bounced back quicker.

 “The good news is that more people are employed, but they are producing less, with their real incomes being squeezed. Labour hoarding by firms and more part-time employment are contributing.
 
“This decline in productivity doesn’t bode well for the UK’s future economic prospects, since it implies that when people do come back to work they will produce less than they did coming out of previous recessions.

“That is why we are cautious about the prospects for economic growth in 2013. The UK economy is not out of the woods yet,” he said.

He predicted the new economic reality could see growth levelling out at around 1.5% per annum rather than 2 or 3%.

“The recession does raise questions about what economic growth will look like in the future. Historically, GDP has grown about 2.5% each year on average. There is a danger that the current recession has left a permanent scar on the economy, which is being picked up in the lower productivity data. If so, when the UK economy does emerge from recession people may well have to get used to less rapid increases in their standards of living than their parents experienced,” he added.

Advisors have also adopted a cautious approach.

Mike Steventon, senior partner of KPMG in Birmingham, said the data contained highs and lows and all eyes would be on the final quarter.

“The 1% growth in GDP was a welcome confirmation that the UK economy emerged from recession in Q3 2012 and was widely predicted following relatively strong employment data over recent months,” he said.

“The Olympic effect has had a significant contribution to growth, with ticket sales alone contributing 0.2% of the increase and further benefits felt in hotel, food and transport activity. However, manufacturing also delivered much needed growth to reverse some of the contraction experienced over the previous two quarters, but it is worth noting that activity levels are still 1.2% lower than Q3 2011.”

“The service sector continues to remain robust and even discounting the Olympic effect, there was continued growth in Business Services and Finance rising by 1% in Q3 2012 and has not contracted in any of the last four quarters.”

“The one disappointment is the continued contraction of the construction sector. The reduction in construction activity reflects the lack of confidence to commit to long-term capital projects and reinforces the welcome news of the Government’s commitment to kick start large infrastructure projects over the coming months,” he added.

The Birmingham Chamber of Commerce Group said effective jjob creation would play a major part in establishing whether the region was able to sustain growth.

Michael Ward, left, the chamber’s president, said much credit for the emergence from recession lay with the private sector, which had shown “tremendous resilience” in attempting to increase business and boost employment levels.

“This news will be welcomed across all sectors of business in our region,” he said.

He said the announcement came after new figures revealed private sector employment levels in the Greater Birmingham and Solihull Local Enterprise Partnership area had grown by 16,300 in the year to September, 2011 at 2.3%, well above the UK average.

“Our figures indicate that this trend has continued and the private sector can give itself a pat on the back for its tremendous resilience. The manufacturing sector is recovering well in the region although the service sector and the construction sector continue to give rise for concern.

“In the latest quarterly economic survey from the chamber many companies said they were struggling to recruit because candidates did not have the required skills, sometimes in basic literacy and numeracy. The government must act now to reduce red tape and make it easier for business to increase staff and sustain that increase.”

Andy Street, chairman of the Greater Birmingham and Solihull LEP, said: “For some time, there has been a sense that economic prospects in the LEP and across the UK have been gradually improving.

“While this has based largely on anecdotal evidence, the announcement from the Government about GDP backs this up.

“Combine this with the ONS report revealing more than 16,000 private sector jobs were created in the LEP for the 12 months up to September 2011, and we have some encouraging signs.

“Now of course, it is important that we press on. LEP-led schemes such as the Birmingham City Centre Enterprise Zone have the potential to help us make further headway in terms of job creation and GDP.”

Louise Bennett, chief executive of the Coventry and Warwickshire Chamber of Commerce, said: “We have been saying for some time now that it is not all doom and gloom in the economy but there are clearly major issues that need to be resolved.

“A rise in GDP is welcome but we recognise that it doesn’t mean the necessary rebalancing of the economy to provide the foundation for sustained growth is complete.

“For example, we know we need to get more companies exporting if we are going to see strong growth in years to come.”

She said more also had to be done to encourage people to start their own businesses.

HSBC said its Growing British Business report revealed 61% of Midlands’ businesses planned to grow in the next two years with clear strategies in place to achieve their ambitions.

Roy Harris, left, HSBC Midlands Regional Commercial Director, said: “These latest GDP figures show an encouraging improvement in the UK’s overall economic conditions.  Our Growing British Business report shows that the majority of Midlands businesses are confident of growth over the next two years demonstrating the tenacity and determination with which business leaders are rolling up their sleeves and driving growth. Ultimately, the approach of these inspirational business leaders will have a positive knock-on effect for UK PLC as a whole.”

He said the rise in employment rates was also a trend highlighted in the report and suggested business leaders were planning to invest in staff over the next two years in order to grow their business.

The chairman of the Institute of Directors in the West Midlands said over-hyping the GDP growth could distract business owners from the real task ahead.

John Rider said: “We get overly depressed when we see a set of figures we don’t like, and so we shouldn’t get over-excited about one quarter’s figures – albeit encouraging as they are.

“This is a recovery that has been coming steadily for 12 months now and the bounce back is good news but not enough to pop the champagne corks. More than half of the quarterly increase is attributable to the Olympics and the reversal of the Jubilee effect in Q2.

“The key message is that we’re out of recession but still uncertain where we are going. We haven’t turned the corner, but we can see the corner.”

He said the IoD’s view was that growth would continue in Q4 but pressure would remain on some sectors.

“We have to recognise there could be some quarters that see a step back in the coming year and we must not over react if that happens either,” he added.

John Cridland, CBI Director-General, said: “It’s really encouraging news that growth has snapped back so strongly in the third quarter. Although the Olympics and Jubilee have made up the majority of that growth, these numbers do also seem to point to some acceleration in underlying momentum.

“We expect conditions to remain positive going into the fourth quarter, reflecting some easing of the pressure on household budgets from lower inflation. But the global economic environment remains challenging.”
 
Nida Ali, economic advisor to the Ernst & Young ITEM Club, said: “This is an even stronger increase in GDP than we were expecting, providing much-needed respite from the doom and gloom. Assuming that the bounce back from the extra Bank holiday in June accounts for 0.5% of growth, Q3 still saw underlying growth of about 0.5% which is really encouraging, particularly in the difficult external environment.

“But looking ahead, the economy continues to face significant challenges, both at home and abroad, so growth in subsequent quarters is likely to remain weak. As such, we still expect the Bank of England to expand QE, once the current tranche of asset purchases ends next month.”