This is a bit of a Great Britain round-up, given the Bank of England’s current deliberations.
Feb. 4 (Bloomberg) — The British economy will shrink until the fourth quarter of this year as the world endures the slowest growth since the end of World War II, the National Institute of Economic and Social Research said.
Gross domestic product will fall 2.7 percent in 2009, compared with a previous forecast of a 0.9 percent contraction, Niesr, whose clients include the Treasury and the Bank of England, said in a report today. It predicts the global economy will expand 0.5 percent, the slowest pace in 60 years.
That differs from Alistair Darling’s current forecast that the UK will emerge from recession in July this year — though, the chancellor has already said he may have to push that date back. That’s the bad.
RBC Capital brings us the ugly in a research snap out today. The investment bank has applied some of the conclusions from a paper entitled “The Aftermath of Financial Crises” by University of Maryland’s Carmen Reinhart and Harvard professor Kenneth Rogoff, to Great Britain.
We compared their statistics summarising the average performance of various economies in the wake of serious financial crises with the current situation in the UK, and the results do not make for happy reading. The analysis covers a wide variety of advanced and developing market crises, from the US in 1929 to Japan in 1992, and including the Scandinavian crises of 1987-91 and the Asian crisis of 1997-98.
Among their findings was the revelation that on average unemployment rises from its trough for nearly five years, and adds 7% to the rate. Thus far in the UK, unemployment has been rising for just 8 months and the rate has only increased by 1.1% from its low point. Housing markets fell on average for a full five to six years, which compares to the 15 months seen thus far in the UK, while prices fell 36% in real terms (UK house prices are off 19.3% thus far).
Perhaps most striking of all given the current market preoccupation with the supply outlook, the economists found that central government debt expanded by an extraordinary 86% on average in the three years following the outbreak of a serious financial crisis. Were this to be repeated in the UK on this occasion, government debt would grow to around £1.13trn by early 2011, equating to 80% of current GDP. There are of course many arguments to suggest the current episode, both for the UK and globally, is very different from anything that has gone before – most obviously, that the scale and speed of fiscal and monetary support may alleviate the dangers, while the global nature of the slowdown and the traumatic unwinding of the fractional reserve banking and leverage system may exacerbate them – but it is a useful comparison to bear in mind as market observers attempt to gauge how far through the painful process of readjustment we may have traveled.
What’s the good, you ask?
UBS banking analysts think the UK government is finally getting its act together in handling the crisis — the British banking sector may even outstrip its peers in terms of a recovery in credit conditions:
While we have spent the last 12 months being critical of the UK authorities’ response to the crisis, recent announcements to support the bank sector now put them firmly ahead of the curve. From a macro-perspective, weaker Sterling, low interest rates and lower commodity prices also help. The combined effect of these measures could mean that by H209, the UK is enjoying a more rapid restoration of credit availability than will be the case among OECD peers…
So. Which view will the BoE take when it makes its interest rate decision tomorrow?
Current consensus is for a 50bp cut — which would be the fifth decrease in a row. In fact, some building societies are lobbying the BoE not to lower rates, saying the cuts have already had a severe impact on savers and pensioners. But, the NIESR is also urging further action – QE in the UK.
The National Institute of Economic and Social Research (NIESR) said an interest rate cut on Thursday would provide no real benefit for the UK economy and the Bank of England should instead get on with buying up corporate debt.
The influential think tank urged action on quantiative easing as it forecast that the UK will contract at its sharpest rate in 60 years in 2009. NIESR expected gross domestic product (GDP) to shrink by 2.7pc this year, although the drop could be tempered to 2.5pc by the knock-on effect from Barack Obama’s proposed fiscal boost.
Related links:
What other financial crises tell us – WSJ
All QEs are not created equal – FT Alphaville