The Economy: Who Is In Charge?

Action October-February

Although both were slow starters, the government and the Bank of England have taken significant action to end the recession. We have had:

(i) interest rate cuts - from 5.5% to .5%;
(ii) Alistair Darling’s £20 Billion Fiscal Stimulus;
(iii) hundreds of £ Billions to support banks;
(iv) a decision for the Bank of England to pump £150 Billion into the economy to increase lending (‘quantitative easing’);
(v) a number of small initiatives to support small firms and borrowers.

More could, and should, have been done – as I have argued in earlier Blogs. However, the above, and the fall in sterling and commodity (especially oil) prices, amount to a significant stimulus to the economy.

Why is it, then, that the doom and gloom persists – in forecasting, as well as in every day experience?

No Conviction

The crucial factor is that, with few exceptions (e g David Blanchflower), the government’s and Bank of England’s forecasters are useless.

When everything seemed to be going well in 2007, the majority of forecasts predicted that things would continue to go well. Now, when everything seems dreadful, most predictions are that things will continue to be dreadful.

To be fair, today (16 March 2009) the Bank’s governor says that the period of deflation need not be long if there is ‘prompt and decisive action’. Although he does not specify, he presumably means government action.

And to be fair to Alistair Darling, he has not, so far as I am aware, departed from his October forecast that we would start to come out of the recession in the middle of 2009.

As I have indicated in earlier Blogs, I am in the Darling camp: my forecast in a February Blog was that ‘green shoots’ will start to appear April/May 2009.

‘Green shoots’ are not, of course, the same as significant recovery, which is why I added that government action on a large scale is necessary.

No Control?

Uncertainty about the future is very largely the result of the government’s, and Bank of England’s, limited control of the economy.

Banks are told to increase lending but they do not – even when it is part of a ‘deal’ when they receive £ Billions of taxpayers’ money.

My prediction on the bottoming out of the recession April/May is based on the fact that the Fiscal Stimulus, aggressive interest rate cuts, the fall in sterling (against the dollar and the Euro), the fall in commodity prices (especially oil), quantitative easing must have an effect.

Timing is clearly a difficulty. April/May will be more than 6 months from the time of the Fiscal Stimulus, and from the beginning of interest rate cuts.

But the recovery will be extremely slow without further government action. This must include taking more control. The priorities are:

(i) lending, to businesses and households, through institutions under government control (Post Office, Northern Rock, Bradford and Bingley, Royal Bank of Scotland, Lloyds Group);
(ii) assisting first time (house) buyers with deposits (e g an interest free government loan);
(iii) additional spending to create jobs, build houses etc along with a convincing strat al egy to repay borrowing from increased taxation (progressive rates on incomes over £80,000) and reducing expenditure (mainly on defence).

These should all be included in the Budget in a few weeks time.

For the details of these proposals see my February Blogs.

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