In The Big Question (20 August) you reported that two-thirds of finance directors believe the UK is heading for a recession, while only around one-fifth believe we are not.
A recession is defined as two successive quarters of falling gross domestic product. Quarterly growth for each of the quarters to 31 March 1998 and to 30 June 2998 was 0.5%.
Our economic model, based on but not subservient to the Treasury?s model, suggests that in the ensuing quarters the quarterly growth rate may slow. Our model suggests quarterly growth will not be negative in any one quarter. On this basis, we believe an outright recession is very unlikely.
Turning to unemployment, the ?trend? growth rate of the UK economy is around 0.5% per quarter; this is the rate at which the economy grows as a result of increases in productivity, improvements in technology, and so on. When growth is below this figure, unemployment will tend to rise; if it is above, then unemployment will tend to fall. Our economic model forecasts quarterly growth in the next few quarters will be somewhere between zero and 0.5%; we therefore expect an increase in unemployment of at least 200,000 in the next year or so as a result of slowing economic growth. But rising unemployment will not mean we will be in recession; it will merely mean the economy is not growing fast enough to prevent unemployment rising.
We can, in fact, talk ourselves into a recession. The more there is talk of a recession, the more confidence is affected, and the more likely one becomes. Constant reference to a recession also undermines confidence in the organisations which seek to control the economy: the Bank of England Monetary Policy Committee, and the Treasury. This undermining of confidence should not be encouraged. Careless talk costs economic growth.
I am not accustomed to putting an optimistic spin on events. Taking Stock once described me as the Cassandra of Chantrey VelIacott. Readers may therefore be reassured that, while I expect unemployment to increase, I believe an outright recession is very unlikely.
Maurice Fitzpatrick is head of economics, Chantrey Vellacott
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