Becalmed UK in danger of double dip

November 2, 2011

By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The UK economy looks dangerously becalmed. While GDP did increase a good-looking 0.5 percent in the third quarter, the number was flattered by a catch up from a royal wedding-distracted spring. Besides, there has only been a 0.5 percent rise over the full year. And now a euro zone storm is brewing. That Tuesday’s UK manufacturing survey for October dropped to the lowest level for over two years is no coincidence — but is alarming.

It was always going to be tough for the British recovery to pick up pace. It has to deal with many adverse currents: tighter fiscal policy, depressed wages and high global commodity prices. Strong export demand would have helped. But now recession threatens the euro zone, the UK’s largest trading partner. The single currency zone has to deal with financial sector stress and fiscal tightening, and its central bank has been less accommodating than the Bank of England.

British policymakers will come under pressure to do more. The Bank of England has already responded to the European threat, and more promptly than the European Central Bank, by launching a 75 billion pound QE2 lifeboat. George Osborne, the Chancellor, promises more help on what he calls “credit easing” later this month. But it is hard to be optimistic that either policy will achieve much. Mervyn King thought QE2 would help avert worse credit tightening.

Another dip into recession will be hard to avoid. That will be arduous — above all for the 2.6 million unemployed Britons. The malaise will put political pressure on the government to take a risk on fiscal policy. A fiscal U-turn, a tax cut or additional government spending in employment-generating capital projects, would be more likely to get the economy moving again.

The government is understandably reluctant. The fiscal deficit is obscenely big and its opponents will say “we told you so”. But, as in any emergency, plans change when things go bad. The risk for the UK government is that things will get considerably worse.

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