When he was Chancellor of the Exchequer, Gordon Brown liked to boast that the UK economy was no long...
When he was Chancellor of the Exchequer, Gordon Brown liked to boast that the UK economy was no longer subject to 'boom and bust'. With the last recession - which ended in 1992 - a distant memory, he probably felt safe in making such a claim. However, in the second quarter of this year, after 63 consecutive quarters of expansion, economic growth came to a standstill. Economists define a recession as two consecutive quarters in which the economy shrinks, and that is the prospect now facing the UK.
Many of the pressures on the UK economy are global in nature.
Higher commodity prices, for example, reflect the inability of producers to keep up with strong demand from emerging economies. The UK economy may be less susceptible to 'boom and bust' than in the past, but emerging economies are not. Over the last four years they grew at an annual rate of 7.5% - double the average of the previous 15 years. One consequence of this boom has been the higher prices that UK households have to pay for food and energy, leaving them less to spend on discretionary items - a major factor behind this year's economic weakness.
It is unfortunate that this has happened at the same time as the global credit crunch. Banks and other financial institutions have reduced the availability of credit, not least to the UK mortgage market, as they try to repair balance sheets that were wrecked by losses on US sub-prime lending. This has helped create an environment of falling house prices, adding to the woes felt by UK households.
The Bank of England might normally react to a credit crunch by cutting interest rates. It is unable to do so in the present circumstances, however, because soaring food and energy prices have lifted consumer price inflation to 4.4% (in July) - far above its target rate of 2%. Interest rates will not be cut until inflation has fallen.
There is also little that Alistair Darling, Mr Brown's successor as Chancellor, can do. At the time of the March Budget, HM Treasury projected a £43bn Government budget deficit for 2008/09. After adjusting for the economic environment in which the country now finds itself, this figure could rise to over £50bn. There is very little scope to cut taxes or boost public spending.
In these circumstances, the best that can be hoped for is that food and energy prices fall next year, lifting households' discretionary spending power.
If this happens, the recession that the UK looks to be heading into will probably turn out to be relatively short and mild. Otherwise, the risk is a deeper and more protracted recession.
Either way, while the UK economy may not have experienced a 'boom' in recent years, it does appear to be heading for a 'bust'.
- The UK economy is facing headwinds from inflation and slowing economic growth;
- The credit crunch means the Bank of England is unable to take decisive action;
- The best that can be hoped for in the near term is a fall in food and energy prices.
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