Is the recession really over?

Britain's economy has shrunk for the last five consecutive quarters, and though talk of "green shoots" is still a no-go political territory, there is now a quiet optimism in some parts of the Treasury that positive growth figures could emerge before the end of the year. Fuelling the optimism are figures from Britain's factories and utilities, which increased their output by 0.5% in June; the survey of service sector performance, keenly watched by the Bank of England, is also showing positive growth for the third consecutive month and at a speed not seen since February of last year. This is the sector that accounts for 75% of the UK economy. If it is doing well, good health elsewhere can be expected sooner rather than later.

Last week even depressed stock brokers were given a break. The FTSE 100 index at one point was up 33% and the pound was trading against the dollar at its highest level for nine months.

Even some banks, as long as the fine print of their performance was not examined too closely, looked financially fitter than expected. Barclays pre-tax profit was £3billion; HSBC showed similar resilience with £2.95bn in their pre-tax profits. RBS, the biggest front-line casualty of the state-backed rescue operations of last year, were marginally back in the black with a £15m profit.

Though their published performances, if examined and dissected in detail, showed the excesses of the risk culture that had brought them to their knees, the banks themselves focused on the positive. Their claim to optimism sounded unified: the worst of the losses were over. Overall the banks reported losses of £34bn, but HSBC and Barclays, who did not put their hands out for taxpayers' cash, were looking better than their rivals.

Lloyds, with pre-tax losses of £4bn for the first half of this year, and still 43% owned by UK taxpayers, insisted that most of the bad news was now out. It said that £13bn of loans and investments, most of it originating from Halifax Bank of Scotland, had turned bad, but that the charges it would need to carry for future bad loans would be smaller.

RBS, which is 70% owned by taxpayers, admitted that its £1bn loss after paying tax and dividends to the government, was "poor". But it too wanted to look on the bright side. Its investment banking division made a £5bn profit. And like Lloyds, the figure doing most of the damage was £7.5bn of assets written off as bad debt.

But confidence and not gloom was the message from RBS's boardroom. Chief Executive, Stephen Hester, said he was confident he can rebuild RBS. Hester was cautious not to sound like a smiling weatherman with a storm approaching, though. "There will be no miracle cure," he said.

But miracles are already being rewarded inside RBS. Less than a year after being bailed out by state-owned funds and with taxpayers technically owning more than two-thirds of the bank, thousands of its investment bankers will be receiving massive bonuses, an indication that that sector at least has remained recession proof. One analysts in RBS called the coming bonuses "the rewards for the untouchables".

In this division of RBS there is no recession to weather. In the bank's results last week, buried deep in accountancy detail, there is £1.8bn set aside to pay staff in its global banking and markets divisions. RBS described this as an "accounting treatment" with Hester himself saying that if his bank was to remain on course and repay its loans from the state, then it has to retain and attract the best people.

Even if recovery is evident before the end of this year, with Labour's election team potentially able to draw up posters claiming Brown as Britain's financial saviour, RBS won't necessarily be net contributors in time for the General Election. Hester's optimism is tempered: "Overall results may not substantially improve until 2011 and full recovery will take time."

TAILS: Don't celebrate yet

TALK of recovery will sound premature, and possibly insulting, to the 33,000 people who were declared insolvent in England and Wales during the second quarter of this year. The Insolvency Service, which doesn't monitor Scotland's rates - though they are similar - says the rate is the highest ever recorded, 9% up on the first three months of the year.

Unemployment continues to rise; bankruptcies are 15% up on the same period last year, with 19,000 people declared bankrupt between April and June. For the treasury, increasing unemployment - which will pass three million early next year - means the bill for unemployment benefits is rising as overall income to the exchequer falls. The previous City-wide culture of never-ending bonuses has gone, and with it the tax revenue.

The level of unemployment, which traditionally lags behind other indicators, means that while banks are shouting that the worst is over, and the government is pointing to positive statistics of output and increasing house prices, that doesn't necessarily reflect good news in the jobs markets.

A new report by the British Chambers of Commerce says that half of all UK companies plan to make redundancies before January. The reality for the outlook on jobs is that there is no end to the recession in sight any time soon.

If there is confusion over whether a stabilising economy merits applause, there is wider confusion among economists about what is going to happen next. There was a guessing game last week about the Bank of England's decision on its quantitative easing (QE) programme, essentially the creation of more money, pumped into the economy to stimulate lending and growth.

Excited by figures on output and rising house prices, David Page, of Investec, said he expected the Bank of England to halt QE, which had reached £125billion. Instead, governor Mervyn King said QE could pass the £150bn already approved by the treasury and he wanted a further £25bn.

According to Stephen Boyle, at RBS, the increase in QE, means neither the Bank of England or the treasury knows for sure whether this key weapon in the fight to escape recession "has managed to stop the rot". Boyle said the better-safe-than-sorry measure means the Bank's monetary policy committee "believes the UK economy remains in intensive care and that a bigger defibrillator is needed to help it emerge from the worst downturn for a generation."

What King's decision points to is not an economy coming out of the dark, but flashes of light in a gloomy landscape.

Instead of a market-driven recovery, where the laws of cyclical growth are about to re-appear, we are being protected by the trillion pound state-funded recapitalisation of banks, the Bank of England printing money. What optimism there is could be temporary.

At RBS, where normality lies beyond 2011, the reality now is loans to small firms in the first six months of this year fell to just £400m. RBS chief executive Stephen Hester denied this was a failure to meet the terms of the state bail-out, but the instincts of many UK banks is still to sit on new cash, rather than lend it. Where lending has taken place, banks and financial institutions have benefited in wholesale market loans. So the culture which brought on the credit crunch is still here.

THE rise in economic output could also be an illusion. After months of firms running down their stock, most of the recent output rise is a restocking exercise. But with increasing unemployment, and consumer confidence low, what is being produced has no guarantee of being sold. Demand just isn't there.

Although the banks claim all the bad news is now out, UK taxpayers still face a growing bill for the "toxic" assets run up by banks' now-ousted regimes.

At Lloyds, where taxpayers' money meant a £14.5bn bail-out amounting to 43% of the bank, the government's asset protection scheme (APS) is about to come into play. Lloyds' bad losses amount to £250bn. APS kicks in once the bank has covered £25bn of its losses. There's only £15bn left before taxpayers' funds are used to help its capital ratios.

How much will taxpayers gain or lose when APS is used? That depends on how long the recession lasts.

For the pessimists only one thing is certain: UK banks are still in no fit condition to claim they can do without help from the government. And the scale of that assistance is still masking the real state of Britain's recession-hit economy.

***

More bad news: pension age set to rise and house deals collapsing

PENSIONS

HIGHER life expectancy could push the state retirement age towards 70, the UK's pension authority warned yesterday.

David Norgrove, chairman of the Pensions Regulator, said people would undoubtedly have to work longer.

A recent report called for the state pension age to rise to 68 by 2044, from its current level of 60 for women and 65 for men. However, Norgrove said: "I think it will end up higher than that. People are going to have to work longer. We as a nation are not going to save as much for retirement as we did in the past."

A lack of public knowledge on how to save meant the ability of the current working generation to pay for the retirement of the previous would be "a real issue for the next 30 years", he added.

"The evidence is that people generally are frightened of saving for pensions. They think pensions are very complicated. Actually, pensions in many ways are quite simple. Once you've made the initial decision, you can let it run."

MORTGAGES

PROPERTY sales are falling through because of lenders and surveyors who deliberately undervalue homes, estate agents have warned.

The National Association of Estate Agents (NAEA) claimed more than 10% was being knocked off the value of some properties.

Lenders will survey a home when offering a mortgage in order to be sure its price accurately reflects its value. If they overvalue it and later end up having to repossess, they may make a loss.

But because of fears over the market, some may be knocking 10% off the true value to cover against future slumps. Estate agents warn this could mean borrowers getting smaller loans than they need, causing deals to fall through.

NAEA chief executive Peter Bolton King said lenders were "perhaps thinking back to the 1990s when surveyors were sued by lenders for allegedly not getting the valuations right". But he added: "We are hearing anecdotally that lenders are giving instructions to their valuers as to how they should approach these valuations."