First Person: Crunch time is to come

By Allister Heath, May 27, 2009
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BELIEVE it or not but Alistair Darling may actually be right that the recession will be over by Christmas.

But before you start uncorking the champagne, it is important to realise that this doesn’t mean a return to the good days. Total 1930s-style catastrophe has been averted, partly by luck and partly as a result of governments flooding the economy with liquidity.

Yet we are still facing a hangover from past over-exuberance, a public sector in complete crisis, an urgent need to wean ourselves from ultra-low interest rates and profligate public spending and a business environment that has been robbed of its competitiveness. So even though the economy will cease shrinking at some point towards the end of the year, unemployment will continue to rise for months after that, house prices will remain depressed and the economy will stagnate for several years to come. From 2010 onwards, the UK will face terrible headwinds: the Bank of England money-printing will have to cease and higher taxes are likely to plug the massive black hole at the heart of Darling’s public finances.

So much for my caveats to Darling’s headline grabbing claims. He is right, however, to argue that the credit crunch is abating. Many companies now find it easier to borrow money in the markets. The banking system has been stabilised; there is almost no chance of any more large UK or US financial institutions collapsing. The stock market is up by almost a quarter, sterling is recovering and bond yields are down. Consumer price inflation is manageable at 2.3 per cent. Savers are being throttled but that, sadly, was to be expected. And all the output surveys now say the same thing: the rate at which the economy is shrinking is slowing down significantly.

The purchasing managers’ index (PMI) for private services rose to 48.7, close to the key 50 reading which denotes the return to expansion. None of this will boost the Labour government’s chances at the general election. There are always lengthy lags between the actual return to economic growth and the public’s perception of it. Companies will continue to lay off large numbers of workers well into 2010, and hundreds of thousands more homeowners are being pushed into negative equity.

The Tories, when they get to power, will be faced with a monumental challenge: rein in the budget deficit and put up interest rates without throttling the nascent recovery, reform the Bank of England and the FSA. And they will have to begin tearing up all the regulations and destructive taxes introduced by Labour to recreate a climate conducive to entrepreneurship, while downsizing the public sector.

Compared to this long list of thankless tasks, getting out of the credit crunch might look as if it was the easy bit.

    Last updated: 3:59pm, May 27 2009