The third quarter GDP figure was very disappointing and much worse than the markets expected. The overall recorded fall was 0.5% in the quarter, with most sectors showing a decrease. There were indeed only two exceptions: agriculture, which must have had a reasonable harvest despite the soggy weather, and, less surprisingly, “Government and other services”. Given that business expectations are worsening, the consumers’ feel-good factor” is evaporating and unemployment is rising quite rapidly, it is almost certain that GDP will fall again in the fourth quarter and the country will then officially in recession – as defined by two consecutive quarters of decreasing GDP.
Given the over-extended state of the consumer and the punctured housing bubble, personal consumption is likely to remain depressed and the recession is likely well into 2009 with any return to growth a tepid and restrained affair. Further cuts in interest rates by the Bank of England, pound permitting, and some easing of the money markets should help to ameliorate the worst aspects of the recession.
Turning to fiscal policy, the Prime Minister announced on Tuesday that he’d spend his way out of recession, as the latest horrendous, borrowing data were released. And the Chancellor has talked about “reprioritising” capital spending by bringing forward funding earmarked for financial year 2010/11 into 2009/10. But there are problems with this. The first is that capital projects take time to implement and the second is the extraordinarily high risk that “retimed” spending merely morphs into “extra” spending – especially as any transfer of funding from 2010/11 to 2009/10 would leave the spending plans in 2010/11 significantly weakened. A Keynesian injection of public spending into an economy may make sense of the public sector is in a fit state to increase its borrowing. But the truth is, it’s not.
Gordon Brown is currently hero of the hour because of the Treasury’s banking rescue plan – which was necessary, comprehensive and bold. The international banking system was collapsing. In early October IMF managing director Dominique Strauss-Kahn warned that the world financial system was teetering on the “brink of systemic meltdown”. This week Alan Greenspan, the former chairman of the Fed, called the turmoil in the financial markets a “once in a century credit tsunami” and commented that events had left him in “a state of shocked disbelief”. And Bank of England Governor Mervyn King said, slightly more prosaically, that “not since the beginning of the First World War has our banking system been so close to collapse”.
But when it comes to the management of the domestic economy, our Prime Minister has been no hero. He has been wilfully spend-thrift with the nation’s finances. Public borrowing may be as high as £65bn this financial year (compared with the budget forecast of £43bn) and up to £100bn next year (compared with a forecast of £38bn). These are huge sums and we can only hope that overseas investors are still prepared to buy British Government debt in large tranches. Mr Brown really should not push ahead and try to spend his way out of recession. It would be highly costly and irresponsible. And hasn’t he wasted enough money already?
