Much of the talk about bank bailouts blithely presupposes there will be good times just around the corner – and the state will sell the dodgy assets at a profit to the taxpayer as happened in New Zealand, Hong Kong etc. It’s the “buy on the dips” mentality – the idea that what goes down must go up and the only question is whether we’re in a U-shaped downturn or a V-shaped downturn. Yet there is a third, horrible possibility: an L-shaped downturn. This prospect should be taken seriously, and here’s why.
Despite all the media references to Britain being “on the brink” of recession, we probably entered one in July. The wait for official statistics means we won’t find out until next year. But this will be no in-and-out dip into negative growth. Several City firms are now forecasting the economy UK will contract throughout 2009. Capital Economics says by 0.2%, Citigroup by 0.5%, Standard Chartered says by 1.7 per cent.
Today’s British Chambers of Commerce survey paints a sickeningly bleak picture. Companies’ confidence readings are all at record lows, and – as this is one of the few series that began in the 1980s – this means they expect this to be worse than the Major recession. Service sector cashflow is at the lowest since records began in 1992. Combine this with rising corporate interest rates and you’re looking at a wave of bankruptcies.
I had thought/hoped the Black Wednesday-scale plunge in pound would lead to an export-based recovery – the type East Asia used to escape its post-bubble economy. There is little sign of that.
I was wary of the idea that more debt is the answer to the debt bubble, but today’s BCC does make the case for drastic action. There’s a case for a major cut, of at least 50 basis points and perhaps more. Vince Cable is right in saying the Bank of England’s structure – the HMT-appointed Monetary Policy Committee – needs to be overhauled. It is single-remit group mandated to look only at inflation. This is what led us into the debt bubble in the first place. They should set CPI aside right now, look soberly at the prospect of an L-shaped downturn and asking what they can do about it. Will they? Let’s see on Wednesday.
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