No End Yet for British Recession

In the first quarter of 2009, the United Kingdom GDP felt by 1.9 per cent quarter on quarter, the steepest quarterly decline in 30 years. What’s next for the British economy? Has the British authorities used all available measures to boost the economy?

During the last few months the British government along with the central bank have implemented various measures to help the sinking economy. For instance, since October the Bank of England has cut its benchmark interest rate by an unprecedented 4.5 percentage points to 0.5%. Nonetheless, the cost and availability of credit still remains poor and banks are not likely to lend yet as they need to repair their overstretched balance-sheets. Moreover, if overnight rates reach zero, the BoE deposit facility and the overnight rate will offer the same rate. Under those circumstances, the interbank market may fade away even more with banks depositing excess funds at the BoE rather than in the money market.

To make things even worst, firms and households are cutting spending and increasing savings in response to high debts, falling asset prices and job losses. For example, the jobless rate rose to 7.1%, up from 5.2% a year earlier and the number of people out of work rose 244,000 to 2.22 million in the first three months of 2009. Moreover, the fall in sterling caused by a general loss of confidence in Britain is not helping the economy.  The competitive edge that this has given British exporters is being dulled by the collapse in foreign markets. Exports of goods are falling steadily since October 2008.

Looking ahead, at Trading Economics we think, the only hope to stabilize the British economy may be further fiscal stimulus and quantitative easing. But can the U.K. handle more debt? In fact, the U.K. Treasury recent estimate on the budget, showed not only that the fall in national output in 2009 would be the biggest since 1945, but also that the budget deficit as a share of the economy, both this fiscal year and next, would be the largest since then. This year alone the government will be borrowing £175 billion ($254 billion), worth 12.4% of GDP. Also, the influence of quantitative easing is very controversial since it is very difficult to assess how much money supply is needed to boost credit markets and for how long those measures should be implemented. There is also another danger by the corner since the ability of new money to boost incomes depends on its velocity”. In fact, institutions expecting further deterioration of the economy may simply put the capital obtained from selling treasuries into deposits instead of investing them.

Anna Fedec,
5/22/2009 8:59:40 AM