In the latest edition of Pulse – UK Economic Outlook, the IoD forecasts Gross Domestic Product (GDP) growth of only 0.9 per cent in 2010 and 1.8 per cent in 2011. The IoD describes this as “one L of a recovery”.

The L shaped cycle does not mean there will be continued zero quarter-on-quarter growth but it does mean that the recovery is likely to be characterised by a weak upward gradient, with quarters of acceleration, deceleration and even decline.

Commenting on the economic outlook, Graeme Leach, Chief Economist at the IoD said:

“After a very abnormal recession it would be foolish to rule out the possibility of a very abnormal recovery as well. A whole host of reasons support the idea of one L of a recovery. One of the key reasons behind this forecast is the potential for further de-leveraging in the household sector and an upward movement in the savings ratio. The savings ratio has increased significantly but it is still well short of the level attained in the wake of previous recessions.”

Other reasons for an L shaped recovery include:

  • A new drop in house prices as although mortgage payments (as a proportion of income) remain reasonably low, housing affordability (the ratio of house prices to incomes) remains expensive. Tighter lending criteria by banks is also acting as a dragging anchor on house prices.
  • Corporate sector finances (excluding commercial property and the banks) are relatively healthy and should not on their own, provide a restraint to recovery. However, working capital for expansion is likely to be more difficult to obtain in this cycle than previously. There may well be a disparity in funding availability between large (with access to capital markets) and small enterprises (more dependent on bank financing).

The IoD states that such is the economic uncertainty at present that a range of downside (double-dip or triple tumble recession) and upside (square root cycle) cannot be ruled out.

The square root cycle describes a situation where there is a period of above trend GDP growth but this then triggers a response by the Bank of England in the form of higher short-term interest rates and/or a reversal in quantitative easing (QE). Any reversal in QE would also put upward pressure on long-term interest rates.

To read the full report, click here: Pulse – UK Economic Outlook

See Also

What is Quantative Easing?  
What is Gross Domestic Product?
What is Gross National Product?  

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