Poll Result: Are we heading for a double-dip recession?

• Yes - 65%
• No - 22%
• Don't know - 13%

1141 votes cast, result on 29 November.

A response from our experts

To begin by defining some terms, economists identify a ‘recession’ as two or more quarters of negative economic growth. This means that the economy has shrunk for at least six months.

While the idea of a ‘double-dip recession’ has been mentioned in various places, there is no agreed definition of what the term actually means.

For example, what period of time would need to have elapsed before two recessions were considered separate events?

Generally, the impression is that a second ‘dip’ would need to occur with 18 months to two years of the first ‘dip’ to be considered a ‘double’.

UK prospects

So what are the prospects for the UK economy and will there be a double-dip?

All the current indications are that economy will not slip back into recession in the near future. While various bodies, such as the British Chambers of Commerce and the Office for Budget Responsibility have lowered their predictions of economic growth rates for next year, no-one is predicting a return to recession.

Therefore, it is unlikely that a double-dip will occur.

While the chances of a double-dip recession look small, this does not mean that the economic situation will be ‘rosy’.

The projected growth rate for 2011 is roughly 2.0%, which compares to a long-term trend growth rate in the UK of 2.5%.

While the difference may not seem large, it is big enough to mean that we will not see a significant improvement in economic conditions over the next twelve months.

Lessons from Japan

If this below trend growth continues, the UK may face similar problems to those currently being experienced by Japan. Japan suffered a recession at the start of the 1990s as a result of the “Asian Financial Crisis”.

While the Japanese economy eventually returned to positive growth, the growth rate was much lower than the trend value. This resulted in what became known at the “lost decade”, with small increases in employment and static living standards.

The recent economic crisis has made the position more difficult, with the Japanese government having run out of ways in which to try and stimulate the economy.

Unknown factors

So while the chances of a double-dip recession are small, the UK’s economic future may not see a quick return to significant economic growth.

The unknown factors here are: the impact of the increase in the basic rate of VAT in January 2011, and the effect of the public spending cuts announced in the Comprehensive Spending Review.

Martin Holmes
Department of Finance, Accounting & Business
University of Wolverhampton Business School