No End Yet for British Recession

In the first quarter of 2009, the United Kingdom GDP felt by 4.9 per cent year-over-year, the steepest decline in record. Recently, the International Monetary Fund has raised its 2010 economic growth forecast for Britain. However, the United Kingdom still has a long way before it can achieve a sustainable recovery.

Indeed, during the last few months, the British government along with the central bank has 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%. In addition, the BoE also implemented quantitative easing. Nonetheless, the cost and availability of credit still remains poor. In April, both lending to businesses and mortgage approvals hit their lowest levels since the start of the decade, and lending hasn't increased much since then.

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, jobless rate rose to 7.2% and the number of unemployed rose by 232,000 to 2.26m people in the three months to April. Moreover, as the global slump curbs orders and rising unemployment undermines consumer spending, companies are being forced to hold production. In May, manufacturing output was down 12.7% and industrial production fell by 0.6% month-over-month. In addition, we can’t forget that fiscal pressure from the government will lead to a combination of higher taxes and lower spending. This year alone the government will be borrowing £175 billion ($254 billion), worth 12.4% of GDP. 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 would be the largest since then.

Anna Fedec,
7/8/2009 6:46:37 PM