UK Public Sector Contraction to Trigger Double Dip Recession

By: Nadeem_Walayat

My recent indepth analysis and forecast of the UK economy for the period 2009 to 2010 concluded that the UK is heading for GDP contraction of 6.3%, and will start to bounce from a 4th quarter 2009 low of -4.75% GDP into the end of 2010. This recovery is expected to be followed by further weakness due to the scale of government borrowing generated in advance of the 2010 general election. On further analysis of the prospects post 2010 suggesting that 2011 and 2012 economic weakness may be as a consequence of a Public Sector Recession.

The current situation in the face of the private sector in meltdown as evidenced today by the collapse of UK car production of 54%, the Labour government is rapidly expanding borrowing in an attempt to fight against the recession by increasingly the size of the public sector whilst the private sector contracts at the approximate rate of 1 new public sector job created for every 10 private sector jobs being lost.

Following the 2010 generational election probable Conservative party victory, the new tory government will have the opportunity and willingness to make deep cuts in public spending both as a consequences of ideology and the dire state of the countries finances. This therefore supports the view that despite a recovering private sector the economy will again enter into a recession during the period of 2011 to 2012 as policy is implemented to reduce government debt and slash wasteful uncompetitive public services that will have mushroomed to an unsustainable size, whilst this action looks set to push the economy back into recession, however it is expected to provide for a more sustainable longer-term footing than the current no holes barred money printing binge that has put Britain on the path towards economic disaster where the potential exists for a prolonged period of economic depression, where years could turn into decades, as occurred during 1918 to 1937 and Japan from 1990.

UK Recession Forecast 2009-10 - Conclusion

The following is the conclusion from the indepth analysis / forecast for the UK economy for the period 2009 to 2010:

In the final analysis, the projected course of the recession over the next 2 years is as illustrated by the below graph in that the severe recession is expected to bottom at an annualised rate of -4.75% GDP in the fourth quarter of 2009 (small quarterly gain on the 3rd quarter), which will be followed by a recovery as the rate of annualised GDP contraction improves as government stimulus measures announced to date and deep interest rate cuts as well as future stimulus during 2009 kick into gear. The UK economic recovery is expected to continue into the fourth quarter of 2010 i.e. after the general election. The total recession from peak to trough is expected to see GDP contract by 6.3% and therefore this will be the worst recession since the 1930's Great Depression.

Unfortunately for the Labour government the economic cycle is completely out of sync with the election cycle as the economy is not expected to emerge from this severe recession until AFTER the next election as 2010 1st quarter GDP is estimated to be at an annual rate of contraction of -3.9% (despite a quarterly gain), this therefore increases the probability of Labour losing the next election as the state of the economy is nearly always the primary determining factor for the electorate. However the Labour government will do its up most to battle against the recession especially once GDP data shows contraction of more than 4% on annual basis, therefore the expectations are strong that the Labour government will sacrifice long-term growth for the short-term possibility of turning the economy around before the 2010 election. This also suggests that the 2010 recovery may not be able to take hold and therefore sets the scene for economic weakness during 2011-2012, perhaps suggesting a double dip recession.

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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