‘40% chance of a double dip recession’

No, not the hysterical rantings of various Labour politicians, but the view of Graeme Leach, Chief Economist and Director of Policy at the Institute of Directors writing on the News of the World yesterday.

He wrote ‘Right now the economy looks like the Battle of Waterloo at lunch-time.

There's no certainty whatsoever of a successful outcome and there's a desperate need for something or someone to ride over the hill and save the day.

For the Duke of Wellington the 'someone' was the arrival of the Prussians, for George Osborne the 'something' will need to be stronger growth in the money supply.
Until the amount of money in the economy grows faster than at present, on a sustained basis, we can't have any confidence the recovery is durable.

But what about the strong growth in GDP in the second quarter you might ask?

Yes the rate of growth was good, but that's likely to be as good as it gets in this recovery. The evidence to date in the third quarter suggests a softening in economic activity if you look at surveys and the housing market.

The labour market looks fairly weak as well, and that's before any shake-out from the public sector gets underway.

So what is the economic outlook? I would give a 40 per cent probability to what I call 'one L of a recovery', in other words a fairly weak flattish cycle over the next 12 months.

A double-dip recession would get a 40 per cent probability as well.

But if we do end up with a double-dip, I wouldn't blame fiscal policy - public spending reductions.

I think the greater threat to the economy at present is with monetary policy and continued de-leveraging by the banks.

The best scenario, with continued growth at the 1.1 per cent (qtr-on-qtr) rate seen in the second quarter, only gets a 20 per cent probability on my reckoning.

What's more even if we do get strong GDP growth for 2-3 quarters that will not be the end of the story.

With inflation 'sticky' and above target, any acceleration in GDP growth would probably trigger a modest upward movement in interest rates and the start of a reversal in quantitative easing - the end result would be a levelling off in growth in 2011.

The cycle would take the shape of a square root sign.

But for those who like near zero interest rates the odds still look stacked in your favour, with no tightening in interest rates for quite sometime yet. Enjoy.

There’s plenty in the article for the both Government’s in Cardiff and London to think about in the coming months.Any source