UK gets set for long slowdown
The United Kingdom’s economy is facing a period at “least as challenging” as the 1970s, when the country sank into a deep recession, the deputy governor of the Bank of England, Charles Bean, warned earlier this week.
He also held out little prospect of any rapid improvement, suggesting that the global economic slowdown was likely “to drag on for some considerable time”.
The glum forecast follows publication of government data last week that showed the UK economy had ground to a halt in the second quarter of the year as households and businesses cut spending. Many economists believe a recession is almost inevitable in the coming half-year.
Bean, who was speaking from a conference of the world’s top central bankers in Jackson Hole, Wyoming, admitted that they as a group had failed to realise the severity of the downturn. He told the BBC: “Last year this was a financial crisis that we thought with a bit of luck would be over by Christmas, but it has dragged on for a year and looks like it will drag on for some considerable time further yet.
“It is fair to say that if you look at the shocks impinging on us, this is at least as challenging a time as back in the 1970s,” he said.
“Some people have said it is as big a financial shock as the Great Depression and as far as the oil shock goes, the rise in oil prices is in the same order of magnitude that we had to deal with in the 1970s.”
It is now more than a year since the credit crunch emerged, after homeowners in the United States began defaulting on their mortgages in large numbers. The impact has been felt around the world, with property prices slumping and triggering the near collapse of banks, including Northern Rock in Britain and Bear Stearns in the United States. Coupled with rising food and energy costs, the global economy is facing potentially toxic conditions.
“There are periods when markets look like they are getting better. Then another grenade explodes, another bout of fear of sustainability of some financial institutions, maybe intervention by the authorities,” Bean said. “It has been very much ebb and flow and the mood here is very much one of financial caution as regards next year. We have our fingers crossed, but there is the recognition there is still quite a long way to go yet.”
He said that disposable income was “very low” and there would be a “tricky period” ahead for households. “There are difficult social issues that will arise.” The annual growth rate in Britain has slowed to 1,4%, its weakest since late 1992 when the pound was forced from the Exchange Rate Mechanism on “Black Wednesday”. A recession is technically defined as two successive quarters of a declining economy. Bean said it was “foolish to believe” that another downturn of that magnitude could be prevented, although better regulation might help cushion the blow.
Two weeks ago the Bank of England governor, Mervyn King, warned that a “difficult and painful” period would bring the economy to a halt in the coming year. He said there were “bound” to be one or two quarters of falling output as Britain felt the full force of rising commodity prices and the year-long credit crunch.
King predicted that inflation would rise to more than 5%, but the fear of recession has convinced economists that the Bank will cut interest rates later this year or early in 2009. The Bank’s monetary policy committee has kept rates at 5% since April, torn between the desire to tame inflation and the need to kickstart the economy. Bean is still holding out hope that the economy will improve next year and described the downturn as a “transitory period of subdued growth”.
“On the assumption commodity prices remain stable and if anything fall back, then inflation should drop back as we go through next year,” he said. “One would hope that the conditions in credit markets should gradually start to improve and those two factors will help to ensure growth will start to pick up as we go through next year.” During the second quarter manufacturing and construction contracted, with only the service sector barely expanding.—