Still falling

Britain's economy

Still falling

Oct 23rd 2009
From Economist.com

Britain's ongoing recession is the longest and deepest since the war

AFP

 

 

BRITAIN'S recession, already the deepest since the second world war, has now become the longest, lasting for six consecutive quarters. Contrary to widely held expectations that the economy had started to recover over the summer, it shrank by 0.4 per cent compared with the level of activity in the second quarter. As a result GDP has now fallen by 6% since its peak at the start of 2008.

 

Even before this unexpected setback the recession was proving harder to shake off in Britain than elsewhere. Helped by the resilience of China, the world economy turned the corner this spring. Germany and France returned to growth in the second quarter. Figures due next week are expected to show that America, unlike Britain, emerged from recession in the third quarter.

 

Earlier this year Britain, rather surprisingly, seemed to be suffering less in the downturn than some other big countries. Germany and Japan had taken a hammering when world trade plummeted after the near-death experience of Western banking systems late in 2008. Their economies were hit especially hard because they specialise in producing investment goods and cars, demand for which had evaporated. Now their prospects are brightening as the inventory cycle turns and global trade starts to recover.

 

By contrast, the continuing slump in Britain reflects the vulnerability of an economy especially laden with debt and with a particularly troubled banking sector. Britain's households are the most over-borrowed in the G7. Its banks have been among the worst affected in the financial crisis as a result of unsound financing practices (a heavy reliance on fickle wholesale funding rather than steadier retail deposits) and insufficient capital to support over-extended lending.

 

The prolonged recession may well lead the Bank of England to extend its programme of quantitative easing when the monetary-policy committee (MPC) meets in early November. Ahead of the meeting, the markets were starting to expect a halt to this policy of buying financial assets (predominantly gilts) with newly created money. The programme of asset purchases was introduced in March in order to give an additional monetary boost to the economy after interest rates had been brought down as low as feasible. In August, to the surprise of the City, the purchases were increased from £125 billion ($207 billion) to £175 billion. With the economy apparently poised to emerge from the recession, this looked to be enough, but that calculation is now obsolete.

 

If Britain’s central bank does increase the target for quantitative easing in November, this is likely to push sterling down, just as occurred over the summer after the MPC’s decision in August. A weaker pound is often seen as a problem, but in fact it is part of the solution for a still floundering economy as it will promote exports and curb imports at a time when domestic sources of demand are still weak.

The prolonged recession will weigh on politics as Britain prepares for a general election. The Labour government has been floundering, too, as Gordon Brown’s unwise boasts to have vanquished boom and bust have returned to haunt him. Mr Brown had been hoping to tell a story of recovery to the electorate when Britain goes to the polls next year, probably in May. Even if the economy does at last pull out of the mire in the final quarter of 2009, as the Treasury expects, that will be a flimsy platform for Labour in the election campaign.

 

 

http://www.economist.com/world/britain/displayStory.cfm?story_id=14732042&source=features_box3