2.4.1 The world economy was better in 2010 than in 2009, with higher levels of economic activity in most parts of the world. The economy will continue to face strong headwinds from three key areas: the rebalancing of the financial and trading system; public sector withdrawal of direct and indirect demand; and low business certainty given weak household incomes and confidence.
2.4.2 The emergent economies, which now, in aggregate, contribute about one half of world output, are leading what recovery there is, with growth rates in excess of 6% in Asia-Pacific in 2010. In contrast, the OECD forecasts real growth for its members (largely developed economies) averaging 2.7% in 2010 compared with -3.3% in 2009. They show no real acceleration into 2010 (2.8%): a distinctly modest recovery.
2.4.3 Following a period of sustained economic growth, the UK economy saw real Gross Domestic Product (GDP) contract for six consecutive periods up to the third quarter of 2009, the longest period of recession since 1955 (when quarterly GDP figures were first collected). At the height of the recession, the economy was shrinking at 2.3% per quarter and 5.9% a year.
2.4.4 Although the national economy is now in recovery – experiencing five consecutive quarters of recorded expansion to date – it faces a number of constraints to growth including weak consumer and government spending, modest investment by business, and a less than hoped for increase in net exports. As the public sector recession takes hold in 2011, the question remains whether the private sector is ready, willing and able to fill the gap.
2.4.5 In common with other more peripheral regions, the recovery in the SW economy has been modest to date, especially in the labour market. In the years leading up to the recession, the public sector was a key source of employment growth in the region – both directly though service expansion and indirectly through procurement and commissioning. The other key source of growth was through property, housing and related business services. It is unlikely that these parts of the economy will supply lots of new news jobs over the next half decade.
2.4.6 The current view is that 2011 and 2012 will be years of moderate forward progress. If the consensus is right, both consumption and investment will show very modest increases. This implies that the output gap resulting from the recession will not be closed, employment will not grow much, if at all. Moreover, there are intense pressures on input prices and living costs from fiscal policy and global markets and, as a consequence, inflation will remain above target.
2.4.7 In the short-term, the main constraint on SW regional economic activity will come from falls in real incomes and discretionary spending. A number of factors will continue to negatively affect the income/spending balance of SW households namely: higher food and energy costs affecting discretionary spending budgets; less access to credit and savings income; falling asset vales affecting wealth-backed spending; cuts to income caused by the private sector recession through fewer jobs, reduced hours and pay; and restraints from public sector withdrawal and higher taxes. These factors suggest dampened affective demand for some time, making it harder for domestic-orientated businesses but, perhaps, encouraging some necessary rebalancing towards external demand by the SW corporate community.
2.4.8 There are other factors, aside from the recession and its legacy, which will have a bearing on the longer term growth prospects of the country and the region. Pressures from climate change, resource prices and the need to invest “to green” our economy, may serve to dampen output growth in the short to medium term, although there is agreement that such ‘greening’ of the economy is an opportunity for longer term growth. In addition, the ageing population may place constraints on per capita growth.