Is the Pound on the road to recovery?

Outlook for the UK economy

How bad was the recession?

This has been the deepest recession since the 1980s. By June of this year, the UK economy was about 6% smaller than it was at peak. Almost half that decline happened between Christmas and Easter, when GDP fell as far in three months as it did in the whole of the early 1990s recession.

That means consumers spending less, and companies producing less, which of course hits profits, the job market and house prices.

Is the recession over?

It looks like the downturn may finally be at an end. We don't have the full data picture yet, but business surveys suggest that the recession ended in the third quarter of this year.

That's a bit earlier than we had anticipated. The main reason has been the speed and scale of the actions by central banks and governments around the world – everything from lower interest rates to the scrappage scheme for the car industry.

That said, the recession’s after-effects will probably continue into 2010, because it has created a large amount of spare capacity. Put simply, the economy is capable of producing more goods and services than people actually want to buy right now. Unfortunately, that means that some of the nastiest aspects of the recession, like rising unemployment and corporate insolvencies, will probably continue for another year or so.

It also means that inflation is likely to fall, since companies have less pricing power. That's one of the reasons we expect the Monetary Policy Committee to leave the Bank Rate on hold at half a percent until 2011.

What happens next?

We think the recovery will probably be pretty sluggish. The recession may be over, but many of the imbalances that helped to cause it are still with us. Some households and companies are carrying a lot of debt, and will probably be more focused on paying that down than they are on spending and investing. Bringing the public sector finances under control will also lead to slower growth compared to the earlier part of this decade.

After nearly two years of recession, the prospect of a sluggish recovery might leave people feeling a bit short-changed. But it's a lot better than we were hoping for at the start of the year, and it's probably fair to say that the risks to our forecast are skewed to the upside.

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