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Triple dip? UK in low spirits as official data may put country back in recession


 

LONDON – Recession may just be a word. But in Britain it may become a habit — and a dangerous one at that.

It’s possible that official figures on first quarter economic growth, to be released Thursday, could show the country is back in recession, and tension is building.

Although economists on average expect growth of 0.1 per cent on the quarter, they warn it would take the smallest statistical variation to put the figure in negative territory. That would place the country in recession, typically defined as two consecutive quarters of economic contraction.

Another recession — the third since the 2008 financial crisis — is already being referred to with foreboding in the media as a “Triple Dip.” Experts warn that its confirmation would create a wave of negative media attention that would scare consumers away from spending, feeding into a vicious cycle that has the economy flat-lining.

“It’s psychological — this is all psychological,” said Cary Cooper, a professor at Lancaster University Management School. “It’s about the message that those figures send to consumers and small businesses.”

The government desperately wants a strong number to justify its increasingly criticized policy of painful spending cuts. But recent indicators on Britain’s economy, the third-largest in the 27-country EU after Germany and France, have been disappointing.

Inflation is rising faster than wages, cutting into people’s standard of living. Unemployment is up at 7.9 per cent. Two international ratings agencies have downgraded the country’s credit grade from the top level AAA, warning about the government’s fiscal policies.

The government, which has long played on its AAA rating as a sign of its economic might, has been pursuing a harsh program of spending cuts and tax increases to reduce the budget deficit, which at 7.4 per cent of annual economic output is more than twice the EU’s 3 per cent limit. Like many governments across Europe that have been scarred by the bond market turmoil that forced Greece and four other countries to need rescue loans, Britain is focusing on reducing debt quickly, even at the cost of short-term economic pain.

What some governments and economists are slowly realizing, however, is that they may have underestimated the damage such austerity would do.

There’s long been pressure domestically in Britain to ease off the budget cuts, but in the past few days the International Monetary Fund also chimed in. The fund, whose views carry weight as it is involved in all of Europe’s sovereign bailout programs, has pressured Treasury chief George Osborne to slow down the austerity measures in hopes of reviving the economy, whose output was worth 1.4 trillion pounds ($2.1 trillion) in 2012.

As the austerity debate rages on, no other person than the national spiritual leader — the Archbishop of Canterbury, Justin Welby — has waded in and used a word no want wants to hear: Depression.

Welby has unusual standing in the world of money because in a previous life he served as an oil industry executive and now sits on the parliamentary banking standards committee. He told an audience at the heart of government in Westminster on Monday that there was an issue of confidence and trust — and there is need to rebuild both.

“I would argue that what we are in at the moment is not a recession, but essentially some kind of depression and it therefore takes something very, very major to get out of it in the same way as it took something major for us to get into it,” he said.

The Bank of England has cut its interest rate to a record low 0.5 per cent and pumped money into the financial system in the hope that will encourage banks to lend money more cheaply. But the results have been mixed and experts say there is only so much a central bank can do to create jobs.

On Wednesday, the Bank of England and the Treasury extended until January 2015 a program to boost lending and help the economy. The program offers funding at low interest rates to banks on condition that those rates are passed on to small businesses and households. Its results so far have been mixed, however.

Even if the economy dodges recession, the daily reality for many Britons remains tough.

The Trussell Trust, a food bank network, said it fed more than 350,000 people in the year ending in March — more than double the 128,000 served in the previous 12-month period. Tim Boyce, a retired investment banker who runs a south London branch, said he’s seeing the people behind those numbers. Inside a frosty church that’s opened its doors to the desperate, he watches as they come for emergency handouts of rice, pasta and beans.

“Most people don’t realize the extent of poverty,” he said as he sipped coffee to keep the edge off the chill. “It’s hiding in plain view.”

Take the cases of Kevin Bishenden, 50, and his wife, Nicola, 40. He’s an upholsterer who says that no one wants to hire someone his age. She says she just can’t find work. The only reason they aren’t homeless is that Britain’s welfare state manages to keep a roof over their heads.

But they’ve slowly been shedding all their possessions, together with memories of a past life. First a bike, then stuff from the kitchen. All the DVDs are going, though even Star Trek only gets you a few pennies. They’ve already sold their wedding rings.

He lamented a new council tax payment of 15 pounds ($22.80) that came into effect as part of government austerity plans. His exhaustion was plain as he tried to imagine paying for it.

“Where’s that supposed to come from?”


 
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Triple dip? UK in low spirits as official data may put country back in recession

  1. Obviously another short recession would be much better for the UK than going the way of Greece or Cyprus. Of course austerity hurts, that’s the whole point. But it’s a necessary pain for future gain.

    You can’t help but laugh at these people who think that the government could somehow spend itself it’s situation. The problem in their current situation is the balance sheet. That’s what needs to be fixed, and it appears the UK has a government that takes that job seriously.

      • Evidence? You didn’t provide any evidence. You linked to an opinion piece, and an article saying that the IMF didn’t like the UK’s austerity measures, not because they were bad for the UK, but because she deemed them bad for everybody else.

        • Where’s your evidence Mr. Omen? It strikes me that the British and EU’s continued dismal economies are solid evidence that austerity has failed. And you didn’t watch the video, I’ll bet — because you apparently refuse to entertain any information that might contradict your view. I suppose it can be difficult to overcome conservatism bias, yet surely it can be done.

          • You want me to provide evidence that a short recession is better than a complete financial collapse of the country?

            You can’t claim that austerity has “failed” simply because it doesn’t fix the problems caused by chronic overspending for decades, in a few short years. That’s the intellectual equivalent of putting a cast on a broken bone and then claiming it doesn’t work when the bone is still broken 5 minutes later.

          • “You can’t claim that austerity has “failed” simply because it doesn’t fix the problems caused by chronic overspending for decades, in a few short years.”

            Ahem, the Conservatives were in power from 1979 to 1997. Labour took over until 2010 — so the lion’s share of the “decades of overspending” must have been the result of Conservative policies. While Labour did support an unnecessary and very expensive war, they did so at the urging of another Conservative government under G.W. Bush. Would that be the “decades of overspending” you refer to? And how many is “a few short years” — enough to starve the entire population of Britain’s working class?

      • Consumer tax increases and budget cuts were Thatcher’s response to a similar situation except she also had high interest rates with the goal of handling inflation. One of the columns I read about her, by Milton Friedman I think, argued that Mitterrand went the other way with his policies and as Britain recovered before France he had to adopt policies more like Thatcher’s.

        • Depends who’s commenting, what they’re commenting on and what they’re measuring. (See Reinhart-Rogoff debacle.) Notwithstanding, the economy of the 80s was very different than today’s with nominal interest rates at the zero lower bound.

          This from the Economist:

          http://www.economist.com/blogs/graphicdetail/2013/04/daily-chart-5

          Also, not everone agreed with everything Friedman said:

          “After Friedman’s death in 2006, Keynesian Nobel laureate Paul Krugman praised Friedman as a “great economist and a great man,” but criticized him by writing that “he slipped all too easily into claiming both that markets always work and that only markets work. It’s extremely hard to find cases in which Friedman acknowledged the possibility that markets could go wrong, or that government intervention could serve a useful purpose.”

          http://en.wikipedia.org/wiki/Milton_Friedman

          • Although the radical low interest rates of today I would say are effectively a spending increase, only by consumers piling up debt in particular – so in that sense it seems like a stronger case against more government spending at the same time.

            The R and R situation is interesting. I saw their original numbers compared to the countries they missed and it looks like a comparable, though lower, increase in growth goes for the debt levels below 90% of GDP as well. So as far as I could guess the corrected numbers show a 1/3 drop in growth for over 90% of GDP in debt. If so, everyone who’s saying they were wrong is doing so on information that actually still shows them to be right.

          • I found their response in WSJ now, my eyeball adjustments were pretty good and they do argue over 90% as a problem for growth

            “we are very careful in all our papers to speak of “association” and not “causality” since of course our 2009 book This Time Is Different showed that debt explodes in the immediate aftermath of financial crises. This is why we restrict attention to longer debt overhang periods in the JEP paper, though as noted there are only a very limited number of short ones. Moreover, we have generally emphasized the 1% differential median result in all our discussions and subsequent writing, precisely to be understated and cautious” http://blogs.wsj.com/economics/2013/04/16/reinhart-rogoff-response-to-critique/

            So it seems their opinion is that long periods of high debt show a 1% reduced growth rate and that their researched correlations were not fundamentally changed by the errors. They hardly admit to the errors, just criticizing implications that they were showed fundamentally wrong which is true enough but pretty waffly.

            It’s perhaps not surprising with such a response to their mistakes that they made them in the first place. I don’t see any reason though to say that low growth is clearly the driver if the association often lasts over 20 years.

          • They are not unintelligent — yet the Very Serious People bought into their conclusions as a justification to “punish the poors” (that’s you and me BTW) even though evidence continues to show it isn’t working. You might not agree, but here’s P. Krugman on the damage done:

            http://krugman.blogs.nytimes.com/2013/04/25/academic-non-obscurity/

          • I think I do agree with Krug that an Iceland style currency devaluation / bankruptcy is better than Greece if not on debt. It hits everyone hard, particularly those who were owed by them but it looks good in comparison. I don’t see why a temporary drop from the Euro isn’t considered an option.

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