The Great Debate UK
from Lawrence Summers:
It is the mark of science and perhaps rational thought more generally to operate with a falsifiable understanding of how the world operates. And so it is fair to ask of the economists a fundamental question: What could happen going forward that would cause you to substantially revise your views of how the economy operates and to acknowledge that the model you had been using was substantially flawed? As a vigorous advocate of fiscal expansion as an appropriate response to a major economic slump in an economy with zero or near-zero interest rates, I have for the last several years suggested that if the British economy – with its major attempts at fiscal consolidation – were to enjoy a rapid recovery, it would force me to substantially revise my views about fiscal policy and the workings of the macroeconomy more generally.
Unfortunately for the British economy, nothing in the record of the last several years compels me to revise my views. British economic growth post-crisis has lagged substantially behind U.S. growth, and the gap is growing. British GDP has not yet returned to its pre-crisis level and is more than 10 percent below what would have been predicted on the basis of the pre-crisis trend. The cumulative output loss from this British downturn in its first five years exceeds even that experienced during the Depression of the 1930s. And forecasts continue to be revised downward, with a decade or more of Japan-style stagnation now emerging as a real possibility on the current course.
Whenever policy is failing to achieve its objectives, as in Britain today with respect to economic growth, there is a debate as to whether the right response is doubling down – perseverance and intensification of the existing path – or recognition of error or changed circumstances and a change in course. In Britain today such a debate rages with respect to the aggressive fiscal consolidation that the government has made the centerpiece of its economic strategy. Until and unless there is a substantial reversal of course with respect to near-term fiscal consolidation, Britain's short- and long-run economic performance is likely to deteriorate.
An effective policy approach to Britain's economic problems must start with the recognition that the principal factor holding back the British economy over both the short- and medium-term is the lack of demand. It is certainly true that Britain faces important structural issues, ranging from difficulties in promoting innovation to deficiencies in the system of worker training. But it is apparent from the relatively low level of vacancies, the reluctance of workers to leave jobs, the pervasiveness across industries and occupations of increased unemployment and the testimony of firms regarding the formation of their investment plans that it is lack of demand that is holding the economy back from producing as much as it could.
from Anooja Debnath:
If it were about age, 40-somethings would cringe. But it seems a dead certainty that 40 now means 50 -- or even higher -- when it comes to predicting the chances of a recession taking place.
Going by past Reuters polls of economists, every time the probability hits 40 percent, the recession's already started or is perilously close to doing so.
By Jamie Jemmeson
-Jamie Jemmeson is a Trader at Global Reach Partners, the foreign exchange company. The opinions expressed are his own.-
The alarm bells have been ringing in the UK since the surprise contraction in Q4 GDP 2010. The Bank of England (BoE) remains in limbo between the ECB, who recently hiked despite their problems with sovereign debt and the US, where quantitative easing remains in force until at least June. The release of the preliminary Q1 GDP on the 27 April could be instrumental in determining not just how the currency and financial markets perform, but in directing measures the BoE and coalition government may have to take. Since the surprise contraction in GDP, the BoE has been forced to sit on its hands and watch inflation continue to increase while reiterating its belief that this is just a temporary phase. There is a real dilemma in the UK that has split the market; will the UK face the daunting reality of a double dip recession?
Ever since the financial crisis broke in 2008 some of the world’s major banks have their governments to thank for their survival. The fates of Royal Bank of Scotland or Citibank would have been much worse without large injections of capital from the UK and U.S. authorities. The UK government pumped more than £37 billion into its largest banks in the immediate aftermath of the Lehman Brothers crisis. Ireland took that a step further when it guaranteed all of its banks’ deposits and liabilities. This was affordable, the Irish government said at the time.
However, this policy failed spectacularly. Ireland’s bailout of its banking sector brought the country to the edge of bankruptcy and forced it to accept a 82 billion euro bailout loan from the IMF/ECB and the European Union. More than 30 billion euros of this loan is to re-capitalise the Irish banking sector and the rest is to shore up the state’s finances. The conditions of the loan mean that Ireland will have to implement harsh austerity measures for many years to come that will inevitably hurt growth.
- Kathleen Brooks is research director at forex.com. The opinions expressed are her own. -
The euro’s resilience in the third quarter has been astonishing. Since reaching a low against the dollar in June, the single currency has appreciated by an impressive 14 percent. This has coincided with the Irish financial crisis reaching boiling point, culminating in the announcement on Thursday by the Irish authorities of the final bill for winding down Anglo Irish Bank.
“Those whom the gods would destroy, they first drive mad.” – the words of a wise Roman thinker (or was it a Greek central banker?). At any rate, the gods certainly seem to have no benevolent intentions with regard to this country, judging by the statements coming from the Bank of England, in particular the calls for another round of quantitative easing from one member of the Monetary Policy Committee and the cry of “Spend, spend, spend” from another.
The view emerging from the Bank and the Monetary Policy Committee is that the country is in the grip of a slow-growth recession, facing the threat of Japanese-style deflation and a double-dip recession, and that this grim situation requires near-zero interest rates, supported by QE2 if necessary, in order to restore consumption and lending (including mortgages) to pre-crisis levels.
from The Great Debate:
"It's like the American dream in reverse." That's how President Barack Obama, ten days after taking office last year, described the plight of Americans hit by the faltering economy. His catchy description fell short -- the dream has turned into a nightmare for tens of millions.
So much so that an opinion poll this week showed that 43 percent of those surveyed thought that "the American Dream" is a thing of the past. It "once held true" but no longer does. Only half the country believes the dream "still exists," according to the poll, commissioned by ABC News and Yahoo against a background of dismal statistics on growing poverty, inequality, unemployment, and Americans without health insurance.
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
Earlier this week the S&P 500 was down 15 percent from its April 2010 high. The ongoing debate on whether the U.S. economy is poised for a double dip recession can be linked with these falls.
By Ian Campbell
– The author is a Reuters Breakingviews columnist. The opinions expressed are their own –
Just in government and David Cameron’s relationships are in question. Eyebrows have been raised about the prime minister’s friendship with an Old Lady, sometimes known as the Bank of England. The affection appears reciprocated by Mervyn King, the Bank’s governor. But to think the Old Lady’s independence is compromised is probably to take things too far. The bank’s current low interest rate policy looks more than just a political favour.
from UK News:
-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --
Alistair Darling promised no election "giveaways" and in one sense he delivered. The UK finance minister's budget is about not giving away the election. It might have been worse -- if Darling had acceded to his boss Gordon Brown's even more populist instincts. But there are vote-seeking swipes at high earners and banks, as well as a crowd-pleasing but misguided tax cut to first-time house-buyers. The UK's budget-balancing pain is being postponed and concealed. And that's risky.