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Economic Recovery: 10 Signs To Look For

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Economic recovery: 10 signs to look for

The news last week from the National Institute of Economic and Social Research that "the recession is over" raised more eyebrows than champagne glasses. While GDP (gross domestic product) may have grown slightly in April and May, most commentators agree the UK is still in a downturn. So how will we recognise the green shoots of recovery when we see them? Here are 10 signs that the economy may be on the up.

1. GDP is in consistent growth

A well-used definition of a recession is two consecutive quarters of negative growth, but that doesn't mean that two consecutive quarters of positive growth shows the economy is out of the woods, says Martin Gahbauer, chief economist at Nationwide building society. "The quarter after that may be negative again. Ideally we need GDP to be growing at around 2.5% annually." GDP fell by 1.9% in the first quarter of 2009 and was 4.1% down on the first quarter of 2008.

2. First-time buyers return

Mortgage lenders have talked a good game when it comes to helping first-time buyers get on the property ladder, with a greater number advertising loans at 90% of a home's value. But credit scoring on these deals is incredibly high, Melanie Bien at broker Savills Private Finance says. "Even if the buyer can get the deposit together there is every chance their application will still be rejected."

According to Peter Bolton-King, chief executive of the National Association of Estate Agents, a healthy property market requires between 25% and 33% first-time buyers. "Currently there is nothing like that level and, as second-time buyers need first-time buyers to sell to, the market can't recover until lending improves."

3. House prices rise sustainably over a longer period

While both Nationwide and Halifax reported house price rises in May, of 1.2% and 2.6% respectively, homeowners shouldn't get too excited. "Average house prices fell by 11% during 1991 and 1992, but there were five monthly price rises in this period," Nitesh Patel, an economist at Halifax, says. "It is important not to put too much weight on any one month's figures."

Ray Boulger at broker John Charcol says: "It took six to seven years for average property values to fall around 15% in the last recession and recovery was also slow. The 20% fall we have seen in the space of 21 months could mean a more rapid recovery."

4. Inflation climbs back up to normal levels

Inflation should be pegged at around 2% a year to see the economy "chugging along", according to Martin Ellis, chief economist at Halifax. But the RPI (retail prices index) measure of inflation is negative at -1.1%. "So-called deflation can be beneficial in the short term as it makes things cheaper for people who are struggling," Ellis says. "But if it becomes persistent it causes a delay in consumption and investment; people adopt an 'it will be cheaper tomorrow' approach."

5. Mortgage approvals hit 100,000 a month

The headlines are alone in painting a rosier picture for mortgage approvals. In April, lenders granted 43,200 mortgages, according to the Bank of England. This compares with 40,000 in March and surpasses expectations of a rise to 41,000. However, the earliest records – dating from April 1993 when the UK was recovering from the last recession – show mortgage approvals at 87,291, the Bank says.

Healthy activity is around 100,000 approvals month, according to Boulger, but he adds: "We may not see this for some time." It took until October 1996 for approvals to hit 100,000 after the last recession – almost four years after it had officially ended.

6. Interest rates come up from the floor

Rock-bottom interest rates are a blessing for homeowners paying variable rate mortgage deals. "In the early 1990s recession, the base rate soared from 7.5% to 15% in a matter of months, which no homeowner budgets for and so was a major cause of repossessions," Boulger says. "With base rate at 0.5% today's homeowners have a much better chance of meeting the mortgage even if their circumstances do change."

But rates of 0.5% do not spell a healthy economy in the longer term. "In any history that is recent enough to be relevant rates average around 5%, which they will climb to again," Boulger says.

7. Negative equity is just a memory (for most)

There are an estimated 900,000 homeowners with a mortgage debt larger than the value of their home, the Council of Mortgage Lenders says, which is still a far cry from the 1.5 million in 1993.

According to Boulger, homeowners who are on a typically priced repayment mortgage and borrowed 90% of the property value when house prices started to fall should be out of negative equity in the next 18 months if house prices recover just 5% from today's levels.

8. Confidence returns to the stock market

At Christmas 2007 the FTSE 100 stood at 6,500 points. It fell to a six-year low of 3,500 in early March this year but has now climbed to around 4,500 points. Jason Witcombe, an adviser at Evolve Financial Planning, says: "The stock markets accurately reflect what the world thinks. Having risen 25% since March the outlook for the next year or two is much better than it was." He adds that investor confidence needs to grow further but the FTSE does not need to return to 6,500 to see a recovery.

9. The pound gathers strength

Last Friday, sterling reached 1.18 against the euro – the highest level since 3 December 2008. Robin McEwen, managing director of foreign exchange specialist Foremost Currency, says: "Positive news from the housing market and reports of GDP growth in both April and May, have contributed to the stronger pound. Providing returned confidence in the British economy continues we can expect to see healthier rates of 1.3 against the euro and 1.7 against the dollar (currently 1.64) towards the beginning of 2010." But McEwen adds that a return to the pre-recession 1.45 against the euro and 2.0 against the dollar is doubtful.

10. Unemployment falls and jobs are secure

Job losses – especially within the financial and manufacturing sectors – continues and there are now 2.26 million people out of work.

Ellis says job security is the key to any recovery. "Unemployment lags behind the rest of the economy. It might be that technically we are coming out of recession, but people won't feel like that if they haven't got a job."

I don't see any of these indicators at this time.

Comments? (this is not a blank cheque for you to overwhelm us with opinion, tired rhetoric, and dodgy figures McSpamish)

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Not sure I agree with all this.

Without going point by point, in general its the "recovery = return to normal" argument.

I don't think what we became accustomed to was as such "normal" and I don't see how that exceptional state will be reached again in the short or medium term.

Just to pick one thing out, the pound at $2 was just too high. To pick another, to deal with neg eq. for a generation of buyers would require something ridiculous and ultimately damaging (yadda yadda) to happen to the housing market.

I think we may have a recovery but it mightn't take the form people are expecting.

I'm not sure if that makes me bullish or bearish(?). Depends I guess.

As it stands, quite a few of those 'signs' are nearly impossible to achieve.

Doesn't mean the economy can't improve though.

Edited by Cogs

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Not sure I agree with all this.

Without going point by point, in general its the "recovery = return to normal" argument.

I don't think what we became accustomed to was as such "normal" and I don't see how that exceptional state will be reached again in the short or medium term.

Just to pick one thing out, the pound at $2 was just too high. To pick another, to deal with neg eq. for a generation of buyers would require something ridiculous and ultimately damaging (yadda yadda) to happen to the housing market.

I think we may have a recovery but it mightn't take the form people are expecting.

I'm not sure if that makes me bullish or bearish(?). Depends I guess.

As it stands, quite a few of those 'signs' are nearly impossible to achieve.

Doesn't mean the economy can't improve though.

I agree. We cannot go back to the way things were, and the path ahead will be a rough one. Employment and IR's will be a good indicator.

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The problem is that recessions are blighted by waves of bad with glimmers of hope in between. I think we've only just been through the first wave - we still have the second wave to ride of a similar magnitude.

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The problem is that recessions are blighted by waves of bad with glimmers of hope in between. I think we've only just been through the first wave - we still have the second wave to ride of a similar magnitude.

Indeed. The flight to more stable assets has not begun, as we still see people holding out for and awaiting the return of 2007 property prices. Ain't gonna happen as the demographics of Britain simply will not sustain it. There is no denying that absolute fact.

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Quote article

Ray Boulger at broker John Charcol says: "It took six to seven years for average property values to fall around 15% in the last recession and recovery was also slow. The 20% fall we have seen in the space of 21 months could mean a more rapid recovery."

Rock-bottom interest rates are a blessing for homeowners paying variable rate mortgage deals. "In the early 1990s recession, the base rate soared from 7.5% to 15% in a matter of months, which no homeowner budgets for and so was a major cause of repossessions," Boulger says. "With base rate at 0.5% today's homeowners have a much better chance of meeting the mortgage even if their circumstances do change."

But rates of 0.5% do not spell a healthy economy in the longer term. "In any history that is recent enough to be relevant rates average around 5%, which they will climb to again," Boulger says.

7. Negative equity is just a memory (for most)

There are an estimated 900,000 homeowners with a mortgage debt larger than the value of their home, the Council of Mortgage Lenders says, which is still a far cry from the 1.5 million in 1993.

According to Boulger, homeowners who are on a typically priced repayment mortgage and borrowed 90% of the property value when house prices started to fall should be out of negative equity in the next 18 months if house prices recover just 5% from today's levels.

So first Ray tells us he is expecting a rapid recovery. Then agrees that low rates aren't good for economy amd rates ARE going to go up. But don't worry about Neg equity, in 18 months house prices will have risen by 5%.

I'd love to know where this guy bought his crystal ball

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Ray Boulger at broker John Charcol says:

Ray Boulger is a embarrassment to himself , back at the beginning of 2008 he predicted

house prices would drop just 2% :lol: ....................Halifax reported 16% drop for 2008

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