Thread: UK to suffer 'severe' recession

Page last updated at 11:50 GMT, Tuesday, 25 November 2008

UK to suffer 'severe' recession


The UK economy is likely to go into a deep recession next year

The Organisation for Economic Co-operation and Development (OECD) has warned of a "severe" economic downturn in the UK in 2009.

The Paris-based body has predicted that economic output in the UK will fall by 1.1% next year, more than any other major G7 country.

Unemployment in the UK is predicted to rise significantly to over 8% by end of 2009 from 5.5% in 2008.

The US economy is forecast to decline by 0.9% in 2009, and Germany by 0.8%.

Economic growth in the 30 countries of the OECD is forecast to fall by 0.4%, before growing by 1.5% in 2010.

The downturn is likely to be the most severe since the early 1980s leading to a sharp rise in unemployment

OECD

As well as the UK, the OECD identifies Hungary, Iceland, Ireland, Spain and Turkey as being the countries most affected by the economic slowdown.

"These economies are most directly affected by the financial crisis, which in some cases exposed other vulnerabilities, or by severe housing downturns," it says.

ECONOMIC FORECAST 2009
UK: -1.1%
US: -0.9%
Germany: -0.8%
France: -0.4%
Italy: -1.0%
Canada: -0.5%
source: OECD (% change in GDP)

In the pre-Budget report, the chancellor accepted that the UK economy would decline by 0.75% to 1.25% next year, but said that the UK was "better placed" than other countries to cope with the downturn.

Government spending

The OECD has endorsed the need for government spending in affected countries to boost growth, because it says that interest rate cuts are no longer effective.

"Against a background of deep economic downturn, additional macroeconomic stimulus is needed," it says.

"Current conditions of extreme financial stress have weakened the monetary transmission mechanism. In this unusual situation, fiscal policy over and above the support provided through automatic stabilisers [such as unemployment benefits] has a role to play."

But it warns that "the scope for easing is limited in countries that start from a weak fiscal position," and warns of the risk of "adverse financial market reaction" unless there is a credible framework for reducing budget deficits in the medium-term.

It forecasts that budget deficits throughout the OECD area will widen from 1.4% of GDP in 2007 to 3.8% in 2009.

In the UK, the OECD says that the fiscal risks are greater because of the costs of the bank bail-outs.

Worldwide slowdown

The OECD warns that any recovery in the US is likely to be "languid" as consumption is held back by the large losses in household wealth.

And it says that the risks are still on the downside, suggesting that economic conditions could worsen significantly.

These risks include "further failures of financial institutions," a "longer period before financial conditions normalise," and the possibility that emerging market countries such as China will be harder hit by the downturn in global trade.

And it adds that when downturns are caused by banking crises, "the recovery is typically more anaemic than usual."

The OECD says the downturn is the "most severe since the early 1980s" and is likely to lead to a "sharp rise in unemployment" with growth not returning to trend before the second half of 2010.

World trade growth will also slow sharply, from 4.8% this year to 1.9% in 2009, which will hit many major developing countries.

However, the slowing economy, and the effect of lower commodity prices, will bring about a sharp slowdown in inflation, leaving space for more cuts in interest rates.

http://news.bbc.co.uk/2/hi/business/7747757.stm

Ambrose Evans-Pritchard



Is Britain going bankrupt?
The bond vigilantes are restive.

We are not yet facing a replay of the 1970s 'Gilts Strike', but we are not that far off either.

There is now a palpable fear that global investors may start to shun British debt as the budget deficit rockets to £118bn - 8 per cent of GDP - or charge a much higher price to cover default risk.

The cost of insuring against the bankruptcy of the British state has broken out - upwards - over the last month. Yes, credit default swaps (CDS) are dodgy instruments, but they are the best stress barometer that we have.

Today they reached 86 basis points, near Portuguese debt in the league table. For good reason. Alistair Darling has had to admit that the British economy faces the most sudden economic collapse since World War Two, and the worst budget deficit of any major country in the world.

Ok, this is a lot lower than Iceland, Ukraine, Hungary, and other clients of the IMF, but is significantly higher than Germany (35), USA (43), and France (49).

After trading at similar levels to our AAA-rated peers for years, we started to decouple in August and then began to soar in October.

We reached a fresh record the moment the Chancellor told the House of Commons that the budget would not return to its already awful condition until 2016.

Should we be worried? Yes.

Marc Ostwald from Insinger de Beaufort said Gilt issuance would reach £146bn in fiscal 2008/2009. Britain will have to borrow £450bn over the next five years.

This is an utter fiasco.

With deep embarrasment, I plead guilty to supporting the Brown-Darling fiscal give-away - though with a clothes peg clamped on my nose. As the Confederation of British Industry and many others have warned, we face an epidemic of bankruptcies unless we tear up the rule book and take immediate counter-action.

The Bank of England's drastic rate cuts are a necessary but not sufficient stimulus. Monetary policy is failing to get traction because the credit system has broken down.

We face the risk of a rapid downward spiral if we misjudge the threat at this dangerous moment, as we sit poised on the tipping point. Besides, the whole world is now resorting to fiscal stimulus in unison under IMF prodding. Sticking together is imperative. If countries reflate in isolation, they can and will be singled out and punished. That is the lesson of 1931.

But this is not to excuse the Brown Government for the total hash it has made of the British economy. It presided over a rise in household debt to 165pc of personal income. How could the regulators possibly think this was in the interests of British society? What economic doctrine justifies such stupidity? Why were 120pc mortgages ever allowed? Indeed, why were 100pc mortgages ever allowed? Debt is as dangerous as heroin.

Labour ran a budget deficit of 3pc of GDP the top of cycle. (We had a 2pc surplus at the end of the Lawson bubble, so we go into this slump 5pc of GDP worse off). The size of the state has ballooned from 37pc to 46pc of GDP in a decade, and will inevitably now rise further.

It is because Gordon Brown exhausted the national credit limit to pay for his silly boom that today's fiscal stimulus - just 1pc of GDP (China is doing 14pc) - is enough to rattle the bond markets. Our national debt will jump in what is more or less the bat of an eyelid from under 40pc of GDP to nearer 60pc - according to Fitlch Ratings. It is enough to make you weep. But is this bankruptcy territory? Not yet. Britain will remain at the mid to lower end of the AAA club.

A Fitch study today estimates the "fiscal cost" of the bank bail-outs (which is not the same as just adding guarantees to the national debt) is 6.9pc of GDP for Britain - compared to Belgium (5.7pc), Germany (5.8pc), Netherlands (6.3pc), and Switzerand (12.9pc). We are not alone in this debacle.

If and when the storm blows over, Britain should still have a lower national debt than Germany, France, or Italy. It will certainly have a better demographic structure that most of Europe (except France and Scandinavia), and less catastrophic pension liabilities than most.

The situation is desperate, but not serious - as the Habsburgs used to say. Fingers crossed.

87 comments
http://blogs.telegraph.co.uk/ambrose_ev ... g_bankrupt