We could be on the road to economic recovery

Aug 15 2008 by Peter Jackson, The Journal

I READ that the Italian economy is shrinking with the imminent prospect of it going into recession. This is despite the valiant efforts of the Jackson family, which has just returned from that country loaded down with Tuscan recipe books and highly coloured fridge magnets.

But, if the statistics are to be believed, output shrank by 0.3% in the second quarter, the Italians’ weakest performance for nearly five years.

Sadly, the Italians are not alone, with some European countries, such as Denmark already in recession or others, such as Ireland, about to join them. The Spanish property market has collapsed and Swiss banking giant UBS has announced another sub-prime debt write-down of US$5.1bn.

I need hardly remind you that the immediate situation is no more cheerful at home, where, unlike the Italians, we haven’t even any sunshine to lift our spirits.

Like-for-like retail sales fell in July year-on-year, the fourth fall in the last five months, and the CBI has revised its economic growth forecast for next year downwards from 1% to 0.4%.

UK house prices continue to drop and the number of people moving house has reached its lowest level since surveys began in 1978.

It’s a gloomy picture all right, but maybe, just maybe, there’s light at the end of the tunnel. It could be the patient’s fever has reached crisis point and he is coming through, albeit clutching weakly at his coverlet.

My reason for almost daring to believe this is that the underlying causes of our problems are being addressed – or at least are addressing themselves.

We are where we are because of high – in some cases inflated – prices, in property, fuel and commodities. These prices have caused the slowdown, which is depressing demand, which in turn is now putting downward pressure on those same prices.

We can see this most obviously in housing, but also – at last – in oil, down to its lowest price since May and in commodity prices, with manufacturers’ input prices dropping 0.6% last month, the first fall in almost a year.

There is still a lot of human misery to come over the next 12 months in jobs lost and businesses going under, but at least the foundations of stabilisation and recovery may be moving into place.