'A dire day for the economy'
Updated on 12 November 2008
With the Bank of England's announcement that the UK is already in recession, Faisal Islam reflects on today's economic data.
Krishnan Guru-Murthy: Our economics correspondent Faisal Islam has just come hot-foot from the Bank of England's news conference with Mervyn King. And this was a really grim outlook.
Faisal Islam: Yes. A day of dire data - three Ds. We have a declining jobs market, we have a downturn - and possibly deflation, too.
The first thing to have a look at is just how sharp the recession may be. The Bank of England were keen to stress the emergency actions they'd taken in terms of cutting interest rates and the banking recapitalisation plan.
All that's going to do is, in their view, change what would have been a potentially Japanese-style longer recession into a fairly deep one-and-a-half to two-year recession. That's what we can infer from their new chart. A sharp downturn of -1.5-2 per cent over the next year and a half.
But they're betting on a big rebound after that. So a grim outlook for the next year and a half or two, but things will bounce back sharply afterwards because of the actions taken by the government.
Krishnan Guru-Murthy: What actions was he talking about?
Faisal Islam: Well, obviously, this huge about-turn in terms of interest rate policy - that was the first thing.
Secondly, interestingly, today's projections did not include the likely impact of this great fiscal stimulus, this tax cut, that we've been hearing so much about but which we may not get for a week or two.
So the important factor now was to establish whether the Bank of England knew about a potential fiscal stimulus before it cut interest rates by 1.5 per cent. And, indeed, whether the governor of the Bank of England, given the dire status of the economy, backs it. And that's what I asked him at the conference earlier.
Mervyn King: In these extraordinary circumstances it would be perfectly reasonable to see some use of fiscal stimulus, provided, I think, two conditions are met. One is that it would be temporary, and secondly, that it would be clear that there was a medium-term plan to bring tax and spending back into a sustainable balance.
A day of dire data - three Ds. We have a declining jobs market, we have a downturn - and possibly deflation, too.Faisal Islam
Krishnan Guru-Murthy: But there was a lot of blame game as well, wasn't there, saying "Why didn't you cut interest rates earlier?"
Faisal Islam: Yeah, yeah. And certainly some contrition from the bank. But equally they were saying "What could we have done? It's not just about the downturn and the banking crisis. Inflation has been rampant up at 5 per cent."
Intriguingly, they predict that RPI inflation might go negative next year now - that really is genuinely deflation. But many questions about whether it was too little, too late, from the Bank of England. And crucially, why is it that Britain's going to suffer the worst recession - another question that I asked the governor.
Mervyn King: We were the only economy in the G7 that had not experienced a quarter of negative output since the early 1990s. All the others had - we hadn't. So it clearly will be seen to that.
I'm not sure that there is any significant difference in the magnitude of the downturn that you would expect. We are a smaller economy. If you average across bigger economies you would expect probably to see a somewhat smaller fall in output.
Faisal Islam: So downturn, a declining outlook for unemployment, and potential deflation. A pretty dire day for Britain's economy.
