Nomura's Richard Koo warns of UK double-dip
Updated on 08 December 2009
Nomura's macro-economics expert Richard Koo tells Faisal Islam the UK and US faces a double-dip recession if the lessons of Japan's slump in the alte 1990s are not learnt.
Richard Koo is chief economist at the Nomura Research Institute and the foremost analyst of Japan's lost decade of growth. He believes the US and the UK are on the brink of repeating the fiscal mistakes made by Japan in the late 1990s, the effects of which are still being suffered.
Speaking to economics correspondent Faisal Islam he blamed the collapse of Lehman Brothers for underpinning the severity of last year's global slump, but said "the problems that we had before Lehman are still with us". Here, he explains what could happen next in the story of this economic crisis.
Does the UK face a "double-dip" downturn?
"Well, the recovery we are seeing to a large extent has to do with to government actions. If those government actions are taken back, and the private sector is still in deleveraging mode, then we will have a double dip. And a double-dip second time round is usually far worst than the first time around.
"First time around, when the economy weakens as a result of the bursting of the bubble, most people tend to blame themselves - "I should have been more careful" and so forth.
"But the second leg, when they realise that monetary policy - zero interest rates, quantitative easing - failed, fiscal policy seems to have failed, then they become excessively pessimistic.
"In Japan that happened between 1997 to 2004. People were so pessimistic, you wouldn't believe. And I hope that doesn't happen here, but it could happen if the UK and the US put in premature fiscal tightening."
What if the government withdraws fiscal stimulus?
"That's exactly the mistake we (Japan) made. When we saw the economy recovering - we had 4.4 per cent growth, the highest among G7 countries - we (Japan) cut the fiscal stimulus and then had five quarters of negative growth, a banking crisis - and that triggered the Asian currency crisis.
"Our budget deficit, instead of declining by 15 trillion, increased by 16 trillion - so it benefited absolutely nobody.
"If the same thing is happening in the US and UK, we will end up making exactly the same mistake."
Quantitative easing: is it working?
"We did that in Japan. We put it in, nothing happened. When we removed it, still nothing happened!
"When you understand that the driver of this recession is private sector deleveraging, you can understand why nothing happened.
"Eventually we came to realise this was a diffferent disease - this is pneumonia, not the common cold. If you insist on using medicines for the common cold, then the situation won't get better."
Budget deficit: how shoud the UK control it?
"If you try to do fiscal reform prematurely, I assure you your budget deficit will increase not decrease.
"As we learned in Japan in 1997, the prime minister tried to cut 15 trillion, by raising taxes and cutting spending, the deficit increased by 16 trillion - 31 trillion difference! It could happen here too."
What next for the UK economy?
"We have to get companies to borrow money again. By this zig-zag of fiscal stimulus you will face this problem maybe five years, six years down the road and that kind of prolongs the problems.
So the choices politicians make right now will determine whether or not we have a lost decade?
"Yes that's very much the case."