Recession

Today’s revised GDP data confirms that the UK remained alone of the world’s major economies in recession in the third quarter of this year*. The fact that the UK remains mired in recession long after most economies have recovered makes clear how uniquely badly positioned the UK economy was to handle a downturn.  While some investment banks continue to argue that this performance reflects the inability of the Office of National Statistics to calculate the data correctly, there is good reason to believe that this huge underperformance is grounded in reality. Economic history teaches that bank crises are amongst the worst things that can ever hit an economy. The collapse

The UK inflation rate again “surprised” to the upside today, registering at 1.5%. As the above chart shows, the UK now has by some margin the highest inflation rate in G7. Were it not for the temporary VAT cut – which takes about 1% off the current CPI rate – the rate would be moving quickly above the Bank of England’s target of 2%. It would seem that the deflation threat, used as justification for the Bank of England deciding to finance the Government’s deficit this year through printing money, has not transpired. A severe recession and rise in unemployment has hit the economy, but this seems to be one

The UK debt crisis has three constituent parts – household, government and banking. The fact that households, government and banks all went on a debt binge at the same time makes the risks for the UK economy so unusual.  The European Commission is now estimating that total UK Government debt will rise above £1.3trillion by the end of 2011, representing a more than trebling in the total debt load since 1997. If interest rates normalise to the 5% or so seen during recoveries in previous cycles, this will see the interest service bill alone rise to around £65billion a year – more than double the total defence budget. Assuming continuing

The warnings from around the world about the scale of the UK’s government debt crisis keep flowing in. Following last week’s warnings from the IMF and European Commission about the scale of the UK debt crisis, credit rating agency Fitch has described the UK as the AAA country most vulnerable to a downgrade. The table at the bottom of the page shows the European Commission’s forecasts for Government deficits as a share of GDP for next year. The UK beats IMF bailout case, Latvia, to head the league table with a deficit level almost double the EU average. The Commission estimates that the UK’s total debt will have almost doubled

On 15th September, Gordon Brown finally uttered the word ‘cuts’, but he diluted the shock by pledging that frontline services would be protected. He told the TUC: “But when our plans are published in the coming months, people will see that Labour will not support cuts in vital frontline services on which people depend. Labour will not put the recovery at risk, protect and improve your frontline services first and make the right choices for low and middle income families in the country.” Today, some of those plans are published, albeit inadvertently in a document leaked to the Observer. Cuts are being planned in next year’s skills budget. 335,000 learners

Readers of the Spectator will know George Trefgarne’s work, and today he delivered an important report on the dangers of Quantitative Easing. I urge Coffee Housers to read the speech. It provides an interesting and relevant insight into historical precedents for the policy and how to manage it, and gives a balanced analysis of the current policy’s pros and cons. Trefgarne concurs with Mark Bathgate’s critique. There is little evidence that QE has stimulated money supply, as banks are using the cash to re-balance their lop-sided books. QE is funding the government’s debt habit. The IMF estimates that QE has reduced the benchmark 10-year interest rate on government debt by

With another £40bn disappearing down the black hole known as the British Banking sector, the financial cost of the economic and banking collapse is now only rivaled by the two World Wars in it’s cost to the UK taxpayer. Rather than going to support credit to business or households, the further £25bn of “newly printed money” announced today is likely to go to help prop up the Government debt mountain.   The above chart shows how the Bank of England has been using quantative easing since March. 98.8 per cent has been used to purchase Gilts. As fast as the Debt Management Office “sells” Gilts to the “market”, the Bank

As another £30 billion of taxpayers’ money is handed over to banks, the role of banking sector in the continuing UK recession cannot be understated. 1990s Japan taught the world that developed economies with zombie banking systems don’t grow.  Crippled by bad debts, lending margins on solvent borrowers increase, credit availability declines and ongoing bailouts are needed. This hampers growth in the rest of the economy. The more indebted the private sector, the greater the damage a bust banking system inflicts. The above chart shows how margins on UK mortgages – the gap between borrowing from the Bank of England and what is then leant to mortgage holders – have

Alistair Darling has unveiled the initial phase of his plan to get the majority state owned banks back into private ownership. RBS and Lloyds will dispose of more than 918 retail branches across the country over the next four years and will receive up to £40bn of taxpayer funds to strengthen their capital bases. In exchange for this injection, both banks have deferred cash bonuses for 2009. Also, Lloyds will not join the government’s asset protection scheme by securing £13.5bn privately through a rights issue. There is an argument that the government should have gone further and demanded the complete separation of retail and investment arms, followed by additional demergers,

So how big a blow was the news that we’re still in recession to Gordon Brown?  Well, compare and contrast his latest podcast on the Downing Street website with David Cameron’s article in the Sunday Times.  Brown’s effort is necessarily defensive.  Gone is the “we’re leading the world” bombast of a few weeks ago, to be replaced with a crude “pledge” to get the economy growing again by 2010: “My pledge to you is to make reform of the financial sector a reality, and to see Britain’s economy return to growth by the turn of the year.” While Cameron’s effort is considerably more agressive, and concentrates on outlining a “pro-growth,