Why we are not heading for a double dip recession...

The economy is recovering faster than expected - up 0.8% rather than the lowly 0.4% predicted by City analysts. The encouraging part is that this is largely driven by the private sector. Construction, which did not fare well in the recession, expanded by 4%.

The cuts in government spending will, cetribus paribus, lead to a double-dip recession. However, this is not the case - other factors in the economy are improving.

The pound has depreciated by approximately a quarter in two years. A weaker pound gives the UK a competitive advantage when exporting. This continued depreciation will give the confidence to firms to invest.

Coporation tax is being reduced from 28% to 24% over a four year period. This will reduce the amount firms lose from profit and hence, provide a greater incentive for firms to expand.

Further, interest rates are at an all time low - the base rate is 0.5%. This reduces the incentive to save and more importantly, makes it more economically possible for firms to finance their investments. It reduces the opportunity cost of investment as returns do not have to be as high to make a profit - less is paid on interest.

Thus, we can see, that other components of aggregate demand - namely, private investment and net exports will make up for the decrease in government expenditure. A double-dip recession is not inevitable.