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News - 19 August 2011
Mervyn predicts stormy weather

Double dip seems increasingly likely

The Bank of England has cut its UK growth forecast for 2011 from 1.8% to about 1.5% as the Chancellor warns that the economy faces a “hard recovery”. The story is much bigger than the UK economy and it faces a lot more than that.

Mervyn King said the spreading Eurozone debt crisis and fears of contraction and possibly a doube dip recession in America overshadowed the world economy adding that the UK economy had weakened since May with inflation on course to climb to 5% before the end of the year.

He warned that, despite not being a member of the Euro, some of the biggest risks to UK economic growth come from the Eurozone saying that their problems “have the potential to have a significant impact on the UK economy".

"The imbalances in the world economy are still not being properly tackled and the burden of debt is still there. This problem will take ....... a number of years before we will find our way through it." However, he also sounded a note of optimism saying, "I don't want to underestimate the gravity of the crisis facing the world economy but ...... the UK has done what it can. We have a credible medium-term fiscal plan, which many countries do not, and we have had a depreciation of our exchange rate which could help exports".  

ECONOMIC PARTNERSHIP COMMENT

In his quarterly report the Governor of the Bank of England made it abundantly clear that the losses that have accumulated in the global economy over the past decade will have to be shared between the key players; creditors and debtors alike. This boils down to the Western debtors balancing Eastern creditors on the global stage and the northern creditors balancing the southern debtors on the European stage.

But this will require an unprecedented level of cooperation that just hasn’t been apparent so far and shows little prospect of appearing in the immediate future. China smugly admonishes a downgraded America and calls for it to put its house in order while resolutely refusing to address its own undervalued currency which keep its export machine buzzing; in Germany politicians are running scared from any policy that smacks of a bailout big enough to do the job properly e.g. a €1 trillion European Financial Stability Facility (EFSF) instead of the paltry €440bn agreed.

The European Central Bank was pushed out of the bunker to buy an inadequate amount of the wrong bonds [Irish and Portuguese instead of Spanish and Italian] but both it and the Bank of England have now done almost all they can to ameliorate the situation, without much success. When the global recession hit in 2008 the UK government was admirably quick to react with a massive reduction in interest rates, a cut in taxes [VAT], increased public spending and a hefty dose of quantitative easing [QE]; apart from the latter there are no levers left that government's are willing to pull.

In the Eurozone, the creation of jointly & severally underwritten Eurobonds is promoted as a compelling solution but the very idea is too close to fiscal union to be palatable on the grounds that it puts an even greater distance between voters and decisions that have a direct impact on their lives. Germany's Federal Minister of Finance Wolfgang Schaeuble, said "I rule out euro bonds for as a long as member states conduct their own financial policies."

Meanwhile, notwithstanding a slight rise in retail sales last month, the America economy is feeble [although it is the only economy to have a growth stimulus package rather than just promoting austerity]; with such uncertainty, no wonder stock markets all around the world are panicking and yo-yoing .

The very real threat of a double dip recession within the current financial year hoves menacingly into view on the horizon. 


Read related items on:
Economic growth
Bank of England
King, Mervyn


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