Recession: How will this recession develop over the next twelve months? Will we see the green shoots of recovery by this time next year?

The following economists’ answers appear in no particular order.

DeAnne Julius, Chatham House and former MPC member

As we enter 2009 the recession, which began around the middle of 2008, is still worsening. I expect output to continue to decline sharply through the spring (second quarter of 2009) for a total peak-to-trough fall of 2 to 3 per cent. By mid-year, however, output should begin to stabilise as the massive policy easing, coupled with the fall in the pound, begin to have their effects. A weak recovery will then commence although unemployment – which lags the output cycle – may continue to rise from its current level of 6 per cent to near 10 per cent by the end of 2009. The year ahead is a case of gloom, but not doom.

Philip Booth, IEA

There will be a further year of negative growth and we will not see the green shoots. If we are lucky we will be able to see where the green shoots might arise at a later time.

Mike Wickens, York University

I would be surprised if the recession lasted for as long as most commentators seems to think. Historically GDP growth rates show very little serial correlation – correlation from one period to the next - in the UK, and even less in the US. This is probably because people are more forward than backward looking as suggested by Keynesian models.

Douglas McWilliams, CEBR

In the UK we are just entering the middle period of the financial crisis that started in summer 2007. 2009 will hopefully see the later phases of this crisis where the authorities will do what they should have done much earlier. There will be more liquidity injections but the critical items will be the sorting out of the toxic loans with the authorities purchasing them. This will in time lead to banks lending to each other.

By contrast, the economic crisis is in its early stages. Most commentators have focused on the consumer. It is true that consumer spending is very likely to decline in 2009, but quantitatively the biggest negative for GDP is likely to be business investment, currently declining 5 per cent a quarter and likely to be somewhere between a fifth and a third down next year as businesses ‘batten down the hatches’. This partly reflects the fact that no one wants to make the refinancing of their borrowing any more complicated than it need be, but more importantly, if you have got cash, you will almost certainly be able to buy something that you really want at fire sale prices next year or in 2010.

Tim Leunig, LSE

No. by this time next year we are unlikely to be able to see any green shoots in any developed countries. it seems pretty unlikely that we will be able to see any green shoots by the following year, although green shoots are often only observable in retrospect, so they may well be around in two years time even if we cannot see them. Deflation will shake itself out of the system in about a year’s time. For the next year a comparison of this year’s oil prices with last year’s oil prices (etc) guarantees that the overall price level will be very low, and even negative. But after that we will be comparing one low price with another: oil cannot go below zero, and I doubt it’s going to go much below $25 a barrel. It has fallen by approximately $100 a barrel from its peak, and clearly it cannot fall another hundred dollars. The same is true for the cost of shipping: the Baltic dry index has fallen 90 per cent, and it cannot fall by the same amount in absolute terms or shipping prices would be strongly negative. It is much easier to have hyper-inflation than hyper-deflation, and I really don’t think we should be too worried about being trapped in a deflationary spiral. Unemployment will still be rising in a years time: unemployment is a lagging indicator, and therefore we can expect to see unemployment rise for the next two years.

Jonathan Loynes, Capital Economics

The recession is likely to get significantly deeper over the next 12 months. History suggests that the economy does not normally start to emerge from recession until about a year after consumer and business confidence has started to recover and there are no signs of that yet. Meanwhile, unemployment has only recently started to rise and house prices look set to drop for some time yet. These developments suggest that household spending - and hence overall GDP – will continue to fall for some time.

By this time next year, the absolute trough in terms of growth is likely to have been passed, so in that sense there may be a few green shoots. But the economy is likely to still be contracting. So the shoots may not yet have broken through the surface.

Jonathan Haskel, Imperial College Business School

No recovery by this time next year. I expect recession to last longer than that.

Oliver Marc Hartwich, The Centre for Independent Studies

The recession will be deeper and longer than forecast in the pre-budget report. I would not expect the recovery to begin before 2010.

Carl Emmerson, Deputy Director,Institute for Fiscal Studies

Not going to tackle this one directly. But on a related topic...I think that the temporary cut in VAT might have a bigger stimulus impact than HMT is assuming. They assume that as long it feeds into lower prices then half of the giveaway will be spent and half will be saved.

But individuals who are myopic, and individuals who are forward-looking but credit constrained, might well spend all of the giveaway they receive. The final group - individuals who are forward-looking and not credit constrained - won’t increase their consumption just because they have more money in their pocket now. But they can be expected to increase their consumption because they see that prices will be relatively higher from January 2010 onwards. As a result it wouldn’t be surprising if this group also increased their consumption by 1 per cent for every 1 per cent temporary drop in prices. (This effect would be particularly strong for durable goods in late 2009). If this is right then the increase in consumption induced by the giveaway would actually be 100 per cent of the giveaway.

Michael Artis, Uni Manchester

Very difficult but there are some positive signs on this one. First, the exchange rate - though stronger than now - will be substantially devalued on 2007 levels and positive impacts on trade should start to kick in. Second, the UK economy is a relatively flexible one now, and likely to pull out a bit faster than (say) germany. Third the pressure of high commodity prices has recede.

Stephen King, HSBC

The recession in the UK is going to be both deep and long. The pace of decline may moderate after the economy hit a brick wall in the final quarter of 2008 but the best that can be hoped for is germinating seeds rather than green shoots. Policy will alleviate some of the downside risk, but the degree to which the country has been living beyond its means suggests that a quick rebound is either unlikely or unsustainable.

Nick Bosanquet, Imperial College

The recession will be a deep one – there will be no general recovery before 2010.

We are at the beginning of a sequence of contractions:

1) The credit crunch hits small firms with short production cycles, and products/services which need longer term credit (e.g. houses, cars).

2) Firms review budgets for 2009-10 and decide on further big employment cut-backs.

3) Larger firms cut back on investment through impact of lower orders and blocks to right issues.

4) Rising unemployment cuts consumption and adds to the fear factor, damping down any housing market recovery which would be brought about by lower prices and interest rates.

5) The Government supports cartels and bailouts which block the recovery drive from competition and new entrants.

John Calverley, Head of research, Standard Chartered

It looks like a very severe recession over the winter due to a massive inventory correction and a sharp drop in business investment in response to the slowdown in consumer spending and shock of the financial crisis. We should see the beginnings of recovery in the US by end 2009 but it may not feel like it. The UK may take a little longer.

Alan Budd, Provost of Queen’s College, Oxford, former chief economic adviser to the Treasury in 1990s and MPC member

Don’t know

Patrick Minford, Cardiff Business School

I think so. While the past year has seen unprecedented monetary tightness, this has now given rise to a large loosening process, though this is still under development because of the problems with lending channels.

Andrew Scott, London Business School

The sharp downward macro dynamics that have been triggered by the banking sector meltdown will continue through 2009 and broaden across the economy. The optimists will be hoping that the rapidity of the decline is due to the cessation of the operation of credit market and that the sharpness of the decline, plus the extreme policy response to these extreme events, will lead to a swifter recovery than otherwise we might expect.

Whilst some financial markets might be showing some green shoots this time next year I would settle for seeing some signs of sap in the gnarled economic branches exposed by the severe pruning of the credit crunch.

Dieter Helm, New College Oxford

The recession will deepen, made worse by the government’s misguided attempts to borrow and then print money. There are unlikely to be any green shoots in 2009.

George Magnus, UBS

The recession is bound to worsen over the winter months with a significant increase in unemployment and in bankruptcies. The destructive deleveraging properties of this recession are going to deepen and lengthen the economic contraction, and will ensure that growth, when it does resume and assuming additional fiscal policy support, remains anaemic for a while. I doubt we shall see those green shoots until the latter part of 2010 at the earliest.

David B Smith, University of Derby and Beacon Economic Forecasting

The current recession is a global phenomenon. Britain has a small open and trade-dependent economy whose output moves closely with the international business cycle. There are several causes of the present global recession. It is not just the result of the so-called ‘credit crunch’. Commentators have concentrated on demand effects. However, it is probable that there has been an element of supply-side degradation in both the US and Britain, where the share of government spending in national output has risen markedly over the past decade. Applying the normal rule of thumb from panel data studies – that a 1 per cent increase in the share of non-productive public spending in GDP reduces the growth rate of per capita real GDP by 0.15 to 0.2 percentage points – suggests that the increased public expenditure ratio will have reduced the sustainable growth rate in the US and the UK by some 1 to 1¼ percentage points. A supply-side deceleration would also explain the weakness of equity markets, whose level reflects the net present value of the future stream of real corporate earnings, and low real bond yields.

Turning now to the more conventional influences on activity, one forecasting problem is that the world economy has suffered not one, but two, adverse shocks in recent years. This makes it difficult to disentangle their relative significance. The first was the rise in the price of a barrel of Brent crude oil from US$54 in January 2007 to US$134 in July 2008. This development would have had a major adverse impact on global activity, even in the absence of a credit crunch. The second adverse factor has been the ‘credit crunch’ itself. This term was first coined in the late 1960s when the US Federal Reserve was attempting to mitigate the inflationary consequences of the budget deficits caused by the Vietnam War and President Johnson’s pursuit of his ‘Great Society’ welfare programmes. This period has obvious similarities to the policies of the Bush Presidency and was followed by the stagflation of the 1970s, not a re-run of the Great Depression. A credit crunch can be regarded as a situation where credit is rationed by availability rather than the rate of interest. The latest ‘credit crunch’ occurred at broadly the same time as the oil price shock and may have been partly caused by it. However, the oil price has since fallen to US$47.6 (on Dec 12). One could argue, therefore, that the world economy will be rebounding strongly by late 2009, after allowing for the normal lags involved, if the previous oil price shock had been a substantial cause of the global downturn.

Any attempt to analyse the impact of the credit crunch encounters the problem that none of the macroeconomic forecasting models employed by the leading central banks, ministries of finance, or academia incorporate credit rationing effects (the same is true of my own Beacon Economic Forecasting model). The recession is almost certainly being built into official forecasts by the use of large judgement-based negative adjustments to the underlying model predictions (it would be interesting to know how much of the change in the Bank of England’s Inflation Report forecasts between August and November was the result of such adjustments, for example). Such downwards adjustments may well be realistic. However, they also mean that the entire model-building community is flying blind. The critical forecasting issues then are: 1) when and whether such downwards adjustments should be removed; and 2) what happens once the negative adjustments come off. If the models have not broken down entirely - which is quite conceivable - one would be looking at a strong rebound in late 2009 and 2010, just when the lagged effects of current low interest rates and fiscal relaxation are building up to their peak. This suggests that there is a reasonable chance - not only that the green shoots will be appearing around this time next year - but that the fiscal and monetary authorities are now over-steering, implying that some policy tightening will be appropriate by early 2010. If that is not the case, I think that all present forecasting models will have to be junked.

Andrew Simms, New Economics Foundation

Without new and different action the recession will worsen and deepen. The dominoes of business failure, unemployment, bankruptcy and home repossessions are still falling. They will have large and hard to quantify knock-on effects. What happens over the year will, however, depend on some factors which are under our control.

The term ‘green shoots of recovery’ is well chosen. Countercyclical investment focused on environmental transformation of the economy is one clear option for government which offers lasting and meaningful potential. For example, with the construction sector suffering as house building goes into reverse, its skills could deliver the long overdue energy efficiency make-over of Britain’s housing and building stock. With the other challenges of the climate crunch and the energy crunch, re-engineering the energy sector and the rapid deployment of renewable technologies - both large scale like off-shore wind and small scale – offers huge potential. According to a recent Deutsche Bank report, renewable energy presents an opportunity that, pound-for-pound of investment, creates anything from double to four times the number of jobs compared to conventional energy systems.

In July 2008, nef (the new economics foundation) published A Green New Deal, with the obvious reference to 1933. As the car industry too looks into the economic abyss, it is time to think big. During World War II, the industry was entirely re-tooled to serve the war effort and then turned back again. Today, instead of swords into ploughshares, perhaps we should be considering Fords into wind turbines.

Howard Archer, IHS Global Insight

We currently expect UK GDP to contract by at least 2 per cent in 2009, and we see the risks to the forecast being significantly slanted to the downside. We expect the UK economy to contract at least up to, and including, the third quarter of 2009. The first half of 2009 is likely to be particularly horrible. It is possible that there may be some green shoots of recovery right at the end of 2009, but they will likely be mixed in with some still pretty poor data. Unemployment, for example, is still likely to be rising sharply this time next year. At best, gradual recovery seems likely in 2010.

David Frost, British Chamber of Commerce

”Over the next 12 months we will see more big companies getting into difficulty and large numbers of people losing their jobs as a result of cost savings. Having said that, by this time next year we will have seen the end of the contraction and the economy will have begun to grow again.

George Buckley, Deutsche Bank

We are expecting a recession of greater magnitude than that of the 1990s, but expect that speedy action by the authorities to provide liquidity and capital to banks, alongside fiscal and monetary support, should prevent a repeat of something more sinister such as Japan in the 1990s or the world economy in the 1930s. There are some similarities with the 1990s’ recession and today - for example, the boom in the housing market beforehand and the inability of the Bank of England to ease policy quickly enough (due to membership of the ERM back in the 1990s, but high inflation in early 2008). On top of those problems, however, this time round we have a credit crunch too - thus our forecasts for a sharper slowdown.

In a year’s time we think output will have stopped falling, but a sustainable return to the heady days of the past decade looks to be a long way off. Trend growth will probably be surpressed over the next decade as the economy adjusts to a world of lower debt.

Robert Barrie, Credit Suisse

It would be nice to think we were half way through the recession, but it’s possible that there is further to go than that. The new year is likely to start as the old one ended, with weak newsflow and a number of concerns and uncertainties. We would hope, however, that things stabilise before long. There has been an enormous policy response and it should start to impact through the course of next year. On a positive note, we think - partly as a result of policy and partly as a result of lower inflation - that real disposable income will grow more strongly over the next twelve months than it has over the past twelve months. Whether the consumer chooses to spend it or not is a different question, but the income should be there either way.

David Page, Investec

We certainly hope so. The key will be any loosening of credit conditions. The measures put in place in October, including banking sector recapitalisation and government guarantees of bank debt (particularly given the latest nuancing of the associated costs) provide some hope of an alleviation of the acute symptoms of the crisis in the first few months of 2009. If not, we expect a further significant intervention by global authorities. That being the case, the powerful monetary stimulus laid down by key central banks should start to find more traction in the respective economies. Depending on the evolution of credit conditions we hope to see contraction ending by H2 2009. However, the ensuing ”recovery” is likely to be subdued as households are likely to undergo ongoing adjustment for a number of years.

Charles Goodhart, London School of Economics and former MPC member

-1.25 per cent Q4 2008
-0.6 per cent Q1 2009
-0.3 per cent Q2 2009
-0.1 per cent Q3 2009
0.0 per cent Q4 2009

Keith Wade, Schroders

Output is likely to fall throughout most of 2009, only stabilising toward the end of the year. As a lagging indicator, unemployment will continue to rise through 2009 and 2010. This time next year, there should be some evidence of recovery as consumers increase spending ahead of the increase in VAT in 2010. This is unlikely to be sustained and the recession will be comparable to that of the early 1980s in depth and duration.

David Miles, Morgan Stanley

The near-term outlook is bleak, but there are reasons to be guardedly optimistic about how the second half of 2009 plays out because of the massive, and recent, policy stimulus we have seen in the UK (and elsewhere). We would expect to see some ’green shoots’ before this time next year.

Richard Jeffrey, Cazenove

Private sector domestic demand is set to contract sharply in the UK in the first half of 2009. Companies attempting to protect their cash positions are likely to cut both inventories and capital investment. The latter is likely to fall more sharply than in either the early-’80s or early-’90s recessions. Household spending is also expected to contract, although there may be slightly improving signs in the second half. With little help coming from an improvement in trade flows, it will be up to the government to provide a positive boost to aggregate demand. Overall, we would expect GDP to drop by around 2 per cent.

Julian Le Grand, London School of Economics

There is a real possibility that the whole thing has been overstated. Many commentators are falling over themselves to make dire predictions about how bad it is going to be, often simply on the basis of straight line projections of current trends. .But most of them failed to predict the turning point when boom turned to bust; so why should we listen to their straight-line forecasts now? In fact, there are a few signs that things may not be so dire after all. In particular, retail sales are not yet anywhere near as bad as predicted; and, although the housing bubble has burst, the stock market was not really suffering from an asset bubble and in consequence, although obviously down, has not collapsed. Also, both oil and food prices are down which considerably increases the purchasing power of many large economies - including China and India. The real danger is that we talk ourselves unnecessarily into a long recession. Confidence takes years to build up, but only seconds to destroy.

Julian Le Grand, London School of Economics

There is a real possibility that the whole thing has been overstated. Many commentators are falling over themselves to make dire predictions about how bad it is going to be, often simply on the basis of straight line projections of current trends. .But most of them failed to predict the turning point when boom turned to bust; so why should we listen to their straight-line forecasts now? In fact, there are a few signs that things may not be so dire after all. In particular, retail sales are not yet anywhere near as bad as predicted; and, although the housing bubble has burst, the stock market was not really suffering from an asset bubble and in consequence, although obviously down, has not collapsed. Also, both oil and food prices are down which considerably increases the purchasing power of many large economies - including China and India. The real danger is that we talk ourselves unnecessarily into a long recession. Confidence takes years to build up, but only seconds to destroy.

Ross Walker, Royal Bank of Scotland

Things are going to get (a lot) worse before they get better. 2008 was characterised by a financial sector implosion; the defining characteristic of 2009 will be these shock waves reaching the real economy and the labour market - and this is when it starts to hurt. We expect to see the resumption of UK GDP growth by end-2009, but suspect that trend rates of expansion will remain elusive until well into 2010.

Peter Dixon, Commerzbank

From both a UK and global perspective, the next twelve months are likely to be nothing short of horrible and we are set for the worst UK recession since the early 1980s. Unlike the 1980s, where the worst impacts were felt in the industrial heartland, this will be a white-collar recession as the financial sector bears the brunt of the downturn. Naturally, this will ripple out to impact other sectors, notably retailers, but spare a thought for the manufacturing sector which will be absolutely hammered by the global downturn. The two key issues are how deep and how long is the recession likely to be. We will be fortunate if the total peak-to-trough contraction in output is not more than 3 per cent and it is likely to be on a par with the 1973-74 recession (when GDP fell by 3.5 per cent) rather than 1979-81 when output fell by 6 per cent. In terms of duration the average length of recessions since 1970 is four quarters. But even if output does stop falling towards the end of 2009 (which is an optimistic assumption), the after-effects of recession will linger well into 2010 as unemployment continues to rise and output growth is at best nugatory. I would have to be very brave to assume we will see any green shoots of recovery on a twelve month view.

Diane Coyle, Enlightenment Economics

It’s almost impossible to know. There are two new countervailing forces. This is the first recession without a substantial stock cycle, the driver of the scale of past business cycle swings; but also the first with the obverse, the extreme dependency of each business on its upstream suppliers and on very short-term decisions by its downstream customers.

Karen Ward, HSBC

The economic outlook will certainly darken before it improves because job shedding has only just begun. The green shoots will emerge when households and corporates are convinced that the policy action administered is likely to work. One of the striking things of the most recent data has been the fact that incredibly aggressive interest rate cuts have had virtually no impact on expectations of the future, whether measured through asset prices, the business surveys, or willingness to spend. Confidence that policymakers have the tools to end the crisis could in itself prove self-fulfilling, as the incentive to hoard cash abates.

Ruth Lea, Arbuthnot Securities

For the UK, the recession is clearly deepening at present. After a fall of 0.5 per cent in GDP in Q3, a fall of the order of 1.0 per cent is expected for Q4. Given the background of the global recession, which will mute any pick up in exports, and the savage curtailment of bank lending, which is getting worse not better, the development of the economy next year is especially difficult to judge. (The combination of this recession being global and the malfunctioning banking sector is a particularly insidious one.)

James Knightley, ING

Hopefully Q4 2008 will be the weakest point globally, but a return to positive numbers remains some way off. The US looks the best bet to see a positive figure in the major developed markets in the next couple of quarters. With the plunge in gasoline prices providing a stimulus of the order of 2 per cent of GDP and the anticipated Obama fiscal package estimated at 5-6 per cent of GDP the US could see positive, albeit weak, growth in 2Q09. However, with unemployment set to rise above 9 per cent and corporate profits & investment set to decline substantially a more sustained recovery story may not come through until late 2009/early 2010 as the effects of the recent sharp drop in mortgage rates and corporate bond yields feed through into the real economy.

In the eurozone the lead indicators suggest that there is significant downside risk to the consensus forecast of a eurozone contraction of around 1 per cent in 2009. The ECB is more reluctant to cut rates, governments are less inclined to offer fiscal stimulus and the moves in the stronger euro will make it more difficult for Europe to export its way out of recession. Therefore, while the eurozone may not contract as much as the US or UK, it is more likely to lag behind on the upturn.

The UK is in a more difficult position given the nation’s debt addiction and the fact that 22 per cent of all private sector employment is in finance, insurance and banking where-as in most ”normal” economies it is 5-10 per cent of private sector employment. This suggests that the UK is going to suffer more than anywhere, which will require further significant stimulus measures. Assuming authorities can get banks lending and borrowing costs continue to fall and business optimism returns on better US numbers from mid 2009 onwards we may see the UK returning to positive growth in 4Q09. Sterling weakness will help here, particularly if global stimulus efforts start to work, thus helping exports.

Andrew Oswald, Warwick University

The dark-side risks I described in my previous year’s return came to pass during 2008. It is unlikely that 2009 will be an enjoyable year - especially for consumers and workers - and we are just going to have to wait for the turn up. Sadly, it is likely that we are going to be reminded of the corrosive effects of large-scale unemployment on human beings’ happiness and psychological health.

Patrick Foley, Lloyds TSB

We look at a small number of scenarios for how the economy might develop over the next couple of years, the main determinants of those scenarios being how long the current extreme risk aversion in financial markets lasts, and how much this feeds through into consumer and business spending. All those scenarios envisage the recession deepening in the first part of 2009 and most point to a GDP decline next year to match the early 1990s. But the scenarios differ in how quickly the economy levels off and recovers thereafter. In my view the most likely scenario at the moment is one where the economy has stopped contracting by the second half of next year, but this is followed by a period of weak intermittent growth, or ‘bumping along the bottom’. Green shoots to look out for are any signs that spreads in financial markets are reverting to lower levels and that asset prices, notable property, are levelling off. Both of these are necessary pre-conditions for a sustained upturn.

David Owen, Dresdner Kleinwort

Sharpest declines in GDP likely to be seen in Q4 2008; and Q1/Q2 2009, may well see GDP falling at a slower rate in Q3/Q4, with the possibility of one up quarter. (We have GDP in the US and UK falling by 2 per cent on average next year; with eurozone GDP down 1.3 per cent, but conceivably fall in eurozone GDP could be a lot worse). Question is whether GDP recovers at all in 2010.

Might well see Green Shorts appearing in things like the OECD lead indicator etc (stockmarket for example may well pre-empt recovery in H2 2009, helping turn around the OECD lead indicator)

Some other things are likely to bottom up and could well start turning up, other surveys including PMIs etc may start turning up (readings may still be below 50, but the trend may clearly be improving).

Even housing market may be showing tentative signs of bottoming; although let’s be clear there is little chance of a housing led recovery! Neither the housing market or bank lending will recover for a long time.

May well be looking for investment/inventories to be catalysts to help turn things around.

Gerard Lyons, Standard Chartered

The recession will be intense particularly in the next six months. A lack of credit forces firms to cut, unemployment rises, confidence slumps, demand falls, prices collapse, margins are squeezed, interest rates hit zero, sterling weakens and public debt rises. This downward spiral needs to be broken.

By autumn 2009, the economy will stabilise, as the huge policy stimulus feeds through. But 2010 is more likely to be a year of stagnation, not a strong rebound. We expect the economy to contract 2.3 per cent in 2009 and to rise only 0.6 per cent in 2010.

The government can’t stop what’s coming in the next few months but it can ease the pain, minimise the impact and prevent the recession from being prolonged. The triple policy boost from low interest rates, a weakening pound and increased government spending is fully justified and needs to be followed by more of the same and by direct intervention. The one thing that would make me genuinely more positive is if the government broke the log-jam on credit and lending.

John Philpott, Chartered Institute of Personnel and Development

There will be a really sharp fall in UK output in the first two quarters, followed by a milder contraction in the third quarter with the possibility of a very small rise in output in the fourth quarter. The first quarter will be particularly hairy. Business confidence will plummet. There will be a period of concern that nothing the Bank of England or Government is throwing at the economy is making any difference. At this point we will have to keep our collective nerve.

Simon Hayes, Barclays Capital

2009 looks set to be a year of falling GDP, rising unemployment and negative inflation. It will probably be the closest experience to the Great Depression since the Great Depression.

Andrew Goodwin, Oxford Economics

The recent dataflow suggests that the current quarter and 2009 Q1 will be particularly bad, but we would expect to see the economy stabilize in the second half of 2009 as the recent monetary and fiscal stimulus begin to take effect

Martin Weale, National Institute of Economic and Social Research

I think it quite likely that we will not see signs of recovery until the start of 2010.

Ian McCafferty, CBI employers’ organisation

The pace of decline in activity over the fourth quarter seems to have surprised even the more gloomy expectations and this is likely to persist at least until the spring. Activity is likely to continue falling over the summer, but if more normal credit flows across the economy can be restored, the economy should start to stabilise over the second half of next year, but any meaningful recovery is unlikely much before 2010.

Malcolm Barr, JP Morgan

Most forecasts have converged on a peak to trough decline in GDP of a similar order of magnitude to the early 1990s recession, with a year of positive but lacklustre growth to follow. My forecasts concurs with that. I would have thought that by the middle of next year the most intense phase of output decline will be behind us, but that rather than perceiving green shoots we will still be worried about ongoing fragility and the possible exhaustion of policy tools.

Michael Devereux, Centre for Business Taxation, Oxford University

I am not optimistic that we will see recovery in the UK in 2009.

Lena Komileva, Tullet Prebon

The drive towards building excess savings has moved from the financial sector into the real economy. Even companies and consumers that benefit from a strong financial position are downscaling in line with expected reduced future income and falling prices. We are likely to see a prolonged period of falling consumer spending as a still unfavourable relationship between mortgage rates and savings (as a share of income) by historical standards is compounded by a softer labour market, declines in housing and pensions equity, and expectations of future tax hikes as well as a desire to build ”shock buffers” due to falling credit supply and general economic uncertainty. The de-leveraging process in the real economy is only in its early stages and, absent any further policy intervention, the process of debt write-offs, restructuring and repayments is likely to last well into 2010 under the title of a general recession.

Simon Rubinsohn, Royal Institution of Chartered Surveyors

Despite pushing hard on both fiscal and monetary levers, it is hard not to see the downturn deepening in the first half of 2009. Both households and businesses will tighten belts further lifting unemployment significantly higher. However, for those still in employment discretionary income should benefit not just from lower mortgage interest payments but also from the eventual drop in utility bills. In addition the likely extension of loan guarantees for businesses and the improvement of terms (as in the case of the Credit Guarantee Scheme) should also gradually begin to impact on bank behaviour. While not wishing to overplay the green shoots theme, we envisage that the ’beginning of the end’ will be in sight during the latter part of next year.

Ray Barrell, National Institute of Economic and Social Research

The answer to this from an academic forecaster (I may be the last one left) is ‘it depends on policy. We do not forecasts recessions for the same reason a car driver and their friends do not forecast a car crash. All we can say is that if you keep on doing what you are doing you may avoid a crash, and if you do something silly (let Lehman go) there will be a serious crash. Our role is to give policy advice in the context of a forecast. We can also say what can be done to pull the economy up and hope people listen. For over a year I have looked at the risks of a banking crisis, and gone through the implications for the economy of allowing it to worsen. I have taken my central bank model users through this a number of times since August 2007. These include almost every central bank in Europe but not the Fed, unfortunately. I am afraid it never occurred to me Bernanke would make such a mistake.

So what happens this year. In October I published a paper in the Review showing that the longer you delayed a resolution of the crisis the worse it would be now. And we have seen delay. Fiscal policy is of some use, but not much, and a VAT cut is of almost no use in a banking crisis as people cannot borrow. Monetary policy is also of little use. So is it inevitable that we will see growth ok less than minus 2 per cent next year? No, as many of the problems could be relived if we saw a recapitalisation of the banking system to give them a 12 to 15 per cent capital base, not the normal 10 per cent or the probably less than that we now see. They need to reduce their leverage ratio. If that is done on the existing capital base we will see a deep recession. If the capital base is expanded by nationalisation then we might see growth around minus one per cent next year. I am sure the Ft has a copy of Milton Friedman’s Monetary History of the US – the chapters on 1929-1933 are well worth reading.

So on green shoots – who sees them first. It depends on who acts first. I suspect the US will see recovery first, as it reacts more quickly, and the dollar is now falling. In addition Obama has a chance of moving to sort out the banks in January. However, it will probably have a much worse recession than the Euro Area. The UK will be lucky to get away with minus 1.5 next year, but this could be much better if we move quickly to recapitalise the banks.

John Van Reenen, Centre for Economic Performance, London School of Economics

We are now in a much better position to understand the causes of the recession, and broadly the policy measures which are needed to pull us out. In the short term a combination of global fiscal stimulus with aggressive and unorthodox monetary policy is the best recipe. In the medium term reforms to the system of financial regulation is called for.

The depth of the recession will be revealed by climbing unemployment rates all over the world. Many of the countries (e.g. Germany) that are still in denial will have a harsh wake-up call. There will be intense political pressure for further bailouts and state subsidies for non-financial sectors which needs to be resisted.

I am optimistic. I believe that we will be seen “green shoots” by this time next year in the US, which is the pivotal country in the crisis. Although the magnitude of the shock is greater, by dint of its flexibility the US economy reacts more swiftly to shocks but also recovers more quickly. And the policy reaction by the Fed has been far more aggressive than in Europe or Asia.

Howard Davies, Director, London School of Economics and former MPC member

I would expect to see some stabilisation in the financial sector over the next few months, though more capital injections into banks, and probably into insurance companies too, may well be necessary. Credit conditions should improve somewhat. But households have too much debt, and deleveraging there could take much longer. So I do not expect to see any significant economic recovery in 2009. I expect the British economy to bump along the bottom, at best.

John Muellbauer, Oxford University

2008 Q4 is seeing ferocious cuts in production across the globe to bring excess inventories under control. This will continue into 2009 Q1. In the US, I would guess that the inventory correction will be largely over by 2009 Q2, and output levels will stabilise. Further policy measures and the sharp rise in real purchasing power, as prices drop, of those with jobs will lead to some recovery in US output by mid-year. The UK will lag behind because the cuts in energy bills arrive far later than in the US. However, lower mortgage interest rates will help those with heavy mortgage debt more than would be the case in the US or in the eurozone, given the continued importance of floating rate debt in the UK. The UK will avoid deflation except in the headline RPI. On balance, I think there will be modest signs of recovery in the UK by the end of 2009.

Amit Kara, UBS

The recession is expected to last through next year. The next couple of quarters are likely to be the worst in this downturn as households rebuild balance sheets and investment spending shrinks. Thereafter the intensity of the shrinkage will ease. The recovery in 2010 will, in all likelihood, be anaemic.

Peter Spencer, York University

The recession is spreading and mutating like a virus and will continue to do this next year. The banking system is in a state of shock, hoarding cash rather than lending it out. We are now seeing this ultra-cautious behaviour spreading to the company sector. Company treasurers are sitting on cash rather than investing. I’m told that contracts that were thought to be in the bag two months ago are just not being signed off. Consumers are next in line and will become much more cautious in their behaviour the New Year.

I seriously doubt that we will see the green shoots of recovery by this time next year. With so many important economic actors in a state of shock, confidence will take a very long time to recover. As the Bank’s October FSR belatedly pointed out, UK banks ran up overseas debts of £740bn between 2000-2006 (50 per cent of GDP). These have a relatively short maturity and are now being repaid out of savings inflows, leaving c nothing for lending next year. It is imperative that the government acts soon on the Crosby recommendation, to help relieve the burden of repayments. The UK recovery will depend critically upon the resumption of international bank lending flows, which seems a long way off.

Steve Machin, London School of Economics

There is likely to be more fallout in the coming twelve months, especially in terms of the labour market which is a lagging indicator and so it seems that unemployment will rise. I am not so sure I will get as high as the 3 million some are predicting. I guess in the absence of any additional significant negative shock, then maybe the recovery will begin towards the end of next year.

Michael Saunders, Citi

The uk economy is in one of the worst recessions seen by the UK or any other g7 country in the last fifty years.

Ian Plenderleith, former MPC member

- I would expect 2009 to be characterised by continuing gloom and a sense that no end is in sight: even when things stop getting worse, there may be an extended period of ”bumping along the bottom”, because policy actions (even when as vigorous as they have been) only work with a lag and confidence will take a long time to recover - especially with unemployment continuing to rise even after the economy has bottomed out. - The really interesting challenge for macroeconomic policy will be when to start withdrawing the pretty strong stimulus (fiscal and monetary) that has (rightly) been given in the past few months. It certainly will need withdrawing in degrees as the economy recovers. But the rub is that, given the lags, if we are to avoid re-igniting inflationary pressures, a start will have to be made before there is much hard evidence of recovery. In such circumstances it will be very hard to persuade people that tightening is justified - particularly hard for the government on the fiscal front if the time for tightening to start is just in the run-up to the next election. So I see the exit from the recession, whenever it comes, requiring some very difficult policy judgements.

Willem Buiter, London School of Economics and former MPC member

Anyone making predictions, especially predictions involving the future is either a knave or a fool. Subject to that, the prospects for the real economy in the next 12 months are pretty dire. The recession probably started in Q2, 2008 and is likely to last for a couple of years more (till the end of 2010). Unemployment (ILO definition) will reach double digits. The reason is that unlike previous recessions (even 1980-82) the financial intermediation mechanism is fundamentally kaput, even before the slowdown in the real economy started. Households in the UK are more highly indebted than anywhere else in the world. With de-facto credit rationing imposed by dysfunctional banks and moribund financial markets, household spending will be even weaker than would be warranted by falling disposable income and rising unemployment. A recovery of household investment (housing, durables including cars etc.) is therefore a long way off. The only green shoots you will see this time next year will be the new grass growing on the grave of ’TEOBAB’ (the end of boom and bust)

Gary Styles, Hometrack

It looks very likely that we are going to experience 2 or 3 quarters of sharply declining output followed by a long period of little of no growth. Spotting any green shoots of recovery in the midst of the gloom is going to be challenge. There is however a possibility that in 12 months time that we may have seen some benefit from the depreciation of sterling and the monetary easing. The sheer size of these policy moves make it likely that after 12 months there should be a tangible benefit.

Alan Clarke, BNP Paribas

We expect the recession to be even deeper than most are anticipating. We expect the economy to contract by around 3 per cent on average during 2009, with a maximum pace of contraction of -3.5 per cent y/y around mid-year.

As for recovery, the best we can hope for this time next year is that the economy will no longer be contracting. The green shoots of recovery are probably not going to be visible until 2010 at the earliest.

Kevin Daly, Goldman Sachs

The short-run outlook is unambiguously bleak and, with the economy being buffeted by several severe shocks at the same time, the uncertainty surrounding any forecast is large. On balance, however, I expect that growth prospects will appear brighter by the end of 2009. While the UK is in the midst of the greatest financial crisis since the war, the response has been the largest monetary stimulus on record.

Sterling has fallen 28 per cent since the start of the credit crisis, with most of that decline taking place in the past two months alone. To put this move into context, Sterling fell by ‘only’ 10 per cent when it was forced out of the ERM in 1992. That easing, together with lower interest rates, boosted growth from -0.4 per cent year-on-year to +3.3 per cent year-on-year over the next 18 months. The global environment is weaker now than it was then but one should not underestimate the size of the stimulus that the UK is receiving.

Sushil Wadhwani, Wadhwani Asset Management and former MPC member

There is a high probability of a prolonged recession, followed by a period of subtrend growth while deleveraging continues. The IMF has shown that, on average, recessions preceded by banking related stress last longer and are associated with a greater cumulative output loss than typical recessions. Having said that, the experience of Japan in the 1990s suggests that significant fiscal stimulus can boost growth for a few quarters before the economy reverts to a recession. Hence, with respect to countries that engage in significant fiscal stimulus, the outturn might look different. Specifically, it is likely that the US economy appears to recover in the second half of 2009 before lapsing into a recession in 2010.

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