WILL APRIL BE THE CRUELLEST MONTH?

Inexcusable Late Start

The Bank of England did not spot the recession until October 2008: the warnings of David Blanchflower (a lone voice on the Bank’s Monetary Policy Committee) were ignored for more than 6 months. Interest rate cuts, October-February, should have started at least 4 months earlier.

We cannot know how many lost their jobs and/or homes as a consequence of this delay. Whatever the number, it was unnecessary and in excusable.

The government, despite its many advisers and consultants, was also a late starter. Thousands had been made redundant, and tens of thousands more were facing redundancy, when Alistair Darling launched his, extremely modest, Autumn Fiscal Package.

‘Too little, too late’ is the, not unreasonable, criticism levelled at both the Bank and the government; although the situation is rather more complex. The Bank was certainly a late starter but, apparently not knowing what else to do, has continued to cut interest rates beyond the point of their effectiveness.

It would have been much more sensible for the Bank to start its ‘quantitative easing’ (pumping more money into the economy) in December rather than March. Late again! Incidentally, the public would be much better informed if the Bank, and the media, explained, clearly, what was happening, instead of using obscure terms like ‘quantitative easing’.



Full-Hearted Recession: Half-Hearted Response

The criticism of the government is not so much that it has failed to act but that it has acted half-heartedly. A string of minor initiatives to halt the recession do not amount to a convincing strategy. What should have been done (e g a much larger Autumn stimulus) is described in detail in my Blog: March 2009? It’s too Late.

The £14 Billion for Northern Rock to lend (announced 23/2/09) is a case in point. The figure should be at least £56 Billion: £14 Billion each, for lending, for the other institutions owned by the government – Bradford and Bingley, the Post Office; Royal Bank of Scotland.

The £14 Billion is intended, particularly, to help first time buyers. Yet, coinciding with the announcement, Gordon Brown wrote an article in the Observer arguing that a 10% deposit should be a minimum requirement. Although this is clearly sound in principle, it is no encouragement for first time buyers - until the government explains how it intends to help them to acquire such a deposit.

The government is unable to act on the scale required because it has boxed itself in. It is afraid to launch a £100 Billion expenditure plan because it lacks the convincing repayment strategy I described in my last Blog.


Will April 2009 be the Cruellest Month?

With the exception of a few ‘Blanchflowers’, experts failed in their predictions. While the sun was shining (people in jobs, house prices rising etc) they, in broad terms, predicted that the sun would continue to shine. Now, when all is gloom and doom, they predict more gloom and doom.

Because the downturn is global, it is impossible for the UK to recover in isolation. However, it seems likely that the action taken by USA’s new President, and his decision (implied in Hilary Clinton’s comments last week) to work more closely with China, will result in greater stability in the next few months.

It is in this context that the UK’s prospects must be considered. My view is that, if the Bank and the government had acted when Blanchflower gave his first warning, the bottom of the recession would have been reached January/February 2009. Their tardiness makes it look more like April/May 2009.

This prediction is made on the assumption that the belated action taken by the government, and the Bank of England, will begin to have an effect from March. The bottoming out of the recession is not, of course, the same as recovery.

The downturn would have been worse without the action taken but it is difficult to see significant recovery without further action.


Action for Recovery

I have been assisted in my predictions by an excellent article by Kevin Daly and Ben Broadbent (Goldman Sachs economists) in The Sunday Times (22/2/09); although the judgements below are, obviously, my own.

My view is that the situation in April will be ready for recovery but that this will not occur without a government expenditure stimulus of, at least, £100Billion, along the lines outlined in my last Blog. As I emphasise there, the key for the government to get out of its box is a convincing repayment strategy.
Providing the government acts now, the factors which will assist the recovery (as Daly and Broadbent point out) include:

(i) the reduction of interest rates (from5% t0 1%);

(ii) the fall in sterling, which makes exports cheaper;

(iii) import substitution – for example, people taking their holidays in the UK, instead of overseas.

In the current global crisis, the fact that the UK relies less on exports than, say, Germany and Japan means that government action can be more effective. It can be more effective because government expenditure can support the production of goods to replace imports, and also because governments can give people money spend.

With regard to ‘import substitution’, Pontins and Butlins are creating new jobs in anticipation of expansion of the home tourist trade. In the retail sector, a number of companies (including Asda, Tesco and Morrisons) have announced the creation of thousands of jobs.

The bringing forward of a number of government capital projects, and the boost to green energy will also create jobs.

Although these are ‘green shoots’, significant reduction of unemployment depends on further government action – quickly, and on a large scale.

For a more detailed discussion of these issues see me two previous Blogs: March 2009? Its Too Late, and A Clear and Convincing Strategy is Required – Gordon.