For the first time, officials and ministers have dared to say the unsayable; that they believe the worst of the recession is over. Chris Smith looks at the issues.




The comments by Lord Mandelson this week on public spending, although political, are based on the current assessment of HM Treasury.

Senior civil servants were presented with the current analysis by Treasury officials last week and this MJ economic report is based on what was revealed.

We have been briefed by a source involved and have also sought further clarification from other senior Whitehall advisers. This is reported under Chatham House rules and no individuals will be identified.

Lord Mandelson talked on the need to rebalance public spending but added the recession was coming to an end but the effects of its severity were ‘not yet behind us'.

The reality

What follows is a detailed breakdown of the extraordinary issues that have had to be met by Government at all levels – and the challenges that now lie ahead.

The clear message is that the worst of the downturn is over and public sector workers can now begin to plan how to support recovery in their communities.

However, there will be clear problems in areas such as housing long into the future.

The good news is that the Treasury fears radical, immediate cuts in public spending will harm the recovery. But what is also made clear is spending levels will not return to current levels. And there will be no clarity on what departments have to spend until after the next general election.

Crawl or dip?

Expert comment has been marked by tentative analysis. Firmly calling the recession ‘over' has been limited by fears of a ‘double dip' recession developing. Clear work on a managed recovery is under way to prevent this happening. Most likely is a slow crawl to recovery; hopes that the party would start again soon (big jumps in house prices and consumer spending late this year) will be dashed.

But recovery is fragile: ‘There is a need for some refocus of the economy but we want to try and control how that happens so it doesn't lead to an even deeper recession.'

However some of the worst forecasts have not been met: ‘We are confident there will be some recovery this year.'

Background

The view from the Treasury builds on the Budget speech delivered by Chancellor Alistair Darling. An under-reported part of the speech was official recognition that the downturn began two years ago.

The banking crisis had ‘turned a serious downturn into a prolonged depression'.

‘At the end of 2007, problems in international mortgage markets began to put a damaging squeeze on credit.

In early 2008, we also saw dramatic volatility in many commodities prices, adding to uncertainty and putting pressure on growth.

‘Last autumn, the dramatic failure of one of the top investment banks in America – Lehman Brothers – shattered already fragile confidence and brought the international financial system to its knees.'

Further analysis has taken place since then of how a recession turned into a global crash.

The role of the media

‘The media has been important. This has been the first global recession on the era of 24-hour global news coverage.'

Reporting of bad news in Japan, Germany or the stock market in South Korea had ‘added to the gathering sense of crisis' but ‘that's part of modern world'.

‘All that means is that events happen a lot quicker than they otherwise would.'

The ultimate driver is partly people's experience of the media but more importantly their experience of real world events.

The current forecast

Compared to previous downturns, this recession will be shorter but sharper and the recovery will be quicker than the 1980s.

‘Inflation is low and prices across the world have fallen quite sharply. The next six months will see a slow increase in activity. Next year growth is expected to be in the range of 1% and 1.5%.'

Inflation in the 70s was running at 25%. Inflation is expected to be 2% and ‘to get back on target over the next couple of years'.

Also aiding recovery has been the fall in oil prices.

Also noted: ‘The IMF backed the "aggressive, bold and wide-ranging response" and the stage is now set for sustainable recovery.'

‘There are always risks.'