Recession May Be Over, But Don't Relax Just Yet

If the recession really is over, what should companies do? Can they take it easy now?

Well, they could try taking the credit for ending the slide in economic activity or they could thank the government for slashing interest rates and keeping consumer spending buoyant.

April’s rise in industrial output, the first for 14 months, signals green shoots. So does increased borrowing by homebuyers. The influential National Institute for Economic & Social Research reckons GDP has risen for two month — a rise in June will officially end the recession after just 11 months, during which GDP fell by five per cent.

So that was it: short and sharp. But an end to recession is not the same as business as usual.

The warning from the credit crisis in mid-2007 ensured industry anticipated a fall in demand and cut back production early.

Indeed, it applied the brakes so hard it deepened the recession. But with demand falling less than expected, companies’ inventories have been depleted and manufacturers are now having to resume production to satisfy orders.

But a rise in output does not mean a return to pre-slump activity. A five per cent fall followed by a one per cent rise still leaves the economy functioning at a far lower level than industry’s become accustomed to — and commerce is not out of the mire yet.

Commodity prices — money, fuel and raw materials — have been cut by the recession but consumer prices remained high, boosting margins.

Even wages have softened. But the low official inflation rates reflect lower housing costs and now they can fall no lower, the annual rates will soon rise again. Indeed, with recession ending, input prices, especially fuel, are increasing again.

Sterling is strengthening too, making exports more expensive. Round the corner will be higher taxes plus severe public spending cuts that will hit government suppliers, especially those selling capital goods.

Any upturn thus risks being hit by a second wave of negative factors, possibly sufficient to turn a V-shaped recovery into a lengthy W-shaped wobble.

So it is a brave business that gears up for a return to pre-crisis activity. Recession provides an easy excuse for rationalisation and cost-cutting, so companies would be wise to continue downsizing while the environment allows it.

The resulting unemployment is part of the problem, of course, but this is an opportunity for business to make itself leaner and fitter for the times ahead.

The 2008/9 recession will be remembered for unprecedented action like bank nationalisation and the return of large-scale state intervention, but it should also be remembered for another unusual aspect — low interest rates.

In past crises, high rates were either the cause or the solution. This time slashing rates has helped keep consumers spending and companies solvent. But while interest rates previously fell as recession ended, this time they must rise. For good or bad, that will temper the recovery.

Leaving aside the figures, what do you think: is the recession over?

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