Recent developments

The UK economy remained in recession during the first nine months of 2009, but the rate of decline slowed in the second and third quarters (see Figure 1.1).

More recent business surveys and data releases point to a modest revival in activity in Q3 2009, led by the services sector, although this contrasts with official GDP estimates. The rate of decline in manufacturing and construction activity has also slowed. Consumer and business confidence has become less negative and the housing market has also shown some tentative signs of recovery, albeit from a low base. Most other major economies have also shown signs of bottoming out according to OECD leading indicators, with China and India in particularly returning to relatively strong growth in the second and third quarters.

However, the extent of the good news should not be exaggerated and to a significant extent just reflects the normal operation of the stock cycle: the period of very sharp destocking has run its course, which will lead to an automatic recovery in orders and output levels in the short term, but the question is whether this upturn can be sustained in the face of rising unemployment and still fragile confidence levels. Credit conditions have improved to some degree, but are likely to remain relatively constrained for some time to come. Oil prices have started to rise again, which could also dampen the pace of global recovery.

Governments around the world have introduced fiscal stimulus packages to support monetary policy easing, which was an appropriate policy in the short term although it has pushed budget deficits up to worryingly high levels from a longer term perspective, not least in the UK. The global financial system has stabilised but it will take some years for US and European banks to repair fully the damage to their balance sheets due tothe crisis. Nonetheless, the risk of a global financial meltdown seems to have been averted, which has underpinned general positive (if volatile) trends in global equity markets since March.