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| Cornered |
| Edward Hadas / Oct 26, 2009, 00:05 IST |
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UK economy: Justice is catching up with the UK. The unexpected 0.4 per cent drop in third-quarter GDP shows the country is getting the severe recession that it deserves. Economists may have thought it was out of the woods. But the UK participated with particular enthusiasm in most of the excesses of the credit boom – real estate speculation, a big current account deficit and trust in a lightly regulated financial sector. To hope for acquittal was naïve.
The 35 economists polled by Reuters all expected a flat or positive reading. But the experts underestimated the continued dire effect of unemployment, uncertainty and the unavailability of credit. The ongoing UK recession still isn’t quite as deep as the slump of 1979-81, when GDP dropped by 6 per cent peak to trough. But a decline so far of 5.9 per cent, subject to revision, is discouraging enough – especially as the authorities responded swiftly and powerfully to the financial breakdown.
Extraordinarily high fiscal deficits, extraordinarily low interest rates and the central bank’s purchase of £175 billion of government debt, about 13 per cent of GDP, have not yet turned the economy around. The UK has provided more official stimulus than its European peers and as much as the US. And yet it is mired in recession.
A common human response to any plan that isn’t working is to try more of the same. The surprising quarterly GDP decline means the government is likely to run larger deficits and the Bank of England is likely to buy yet more government debt. But there are limits. The authorities will be restrained from doing much more by the fear of a run on the pound – it dropped two cents against the dollar, to $1.64, on the GDP news.
The UK recession is bad, but not disastrous. And as long as a run on the currency is avoided, output isn't likely to fall much further. Still, the latest evidence points to a slow and weak recovery. Some of the punishment for previous excesses still lies ahead, in what will be a painful 2010.
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