These are the two most probably outcomes for the UK economy over the next few years with many economists taking the view of a double dip recession or prolonged slow growth.

The key issue for the UK is the size of the national debt which has to be cut substantially in the next 5 years (or sooner).  Failure to cut debt will increase the UK’s risk rating in markets, resulting in higher borrowing costs for the Government and a weakening of the currency.

The IMF have recently stated that the “biggest problem” facing recovery is the size of state debt, and that some countries may take up to 7 years for debt levels to be reduced to a more manageable level. 

One of the recent countries in the news is Greece with national debt as a proportion of GDP even higher than the UK.  The problem for Greece is an interesting one, as a full member of the Euro it has much tighter conditions to comply with.   So far Greece has outlined a plan to halve the country’s debts in 2-3 years, some feel this may not be achievable.

Back to the UK, the added complexity is the pending election.  Right now the UK is stalling on decisions to cut debt, the dilemma for the Government is the (perhaps) negative voter reaction when faced with substantial cuts and job losses.

This last point we have blogged about earlier, cutting back on jobs, which may well be needed in the public sector, will have an adverse effect on short to medium term economic growth.  As we pull money out of the economy it is only logical that this will create a downward pressure on the economy.

So, double dip recession or prolonged slow growth? Our view here is that the economy will dip briefly back into recession as the effects of budget cuts unwind.  All will become much clearer after the pending election and decisions taken to cut the budget deficit.

Recent date published identifies falls in unemployment of around 7000 at the end  of 2009, but is this a statistical blip, or is it at trend?

One of the theories being discussed is the drop in unemployment is due to a seasonal increase in part time employment often seen around the Christmas period peak retail sales. We will know for sure when the February figures are published (post new year sales, retailers tend to slow down).

The key question for most people is what about 2010?  Recent indications form the Bank of England suggest that markets are becoming concerned about action to reduce UK debts.  The strategy proposed by labour is to halve the deficit in 4 years, but is seems the “markets” are indicating much faster cuts in the deficit are required.  So what does this mean for the economy?

The key factor will be the balance between sufficiently aggressive cuts to ensure we do not have pressure on sterling, but equally not too aggressive such that we thrust the economy back into a recession.

The bottom line is no one can be certain, however it is a possibility that we could have a double dip recession.  Lets hope that whoever gets elected gets the balance just right!