UK Economy Needs More Than Quantitative Easing To Recover

Britain's cycle of rising debt and dependence on consumption to drive growth make it unlikely to bounce back any time soon.












Britain has just been through what is now officially the deepest slump since the Great Depression – pictured, the unemployed marching in London in 1930.

Britain has just been through what is now officially the deepest slump since the Great Depression. Economic data from the pre-war era is not 100% reliable, but the drop in output after the sub-prime mortgage crisis appears to have been almost on a par with the contraction following the Wall Street crash. What's more, the recovery – such as it is – has been even slower than in the 1930s.

Talk of a lost decade is not misplaced. The economy is likely to grow by barely 1% this year and will struggle to do much better than that in 2012. At this rate of progress, it will be 2016 before output returns to its level when the recession started in early 2008.

This performance looks all the more miserable when you consider the amount of stimulus that has been thrown at the economy. Interest rates were cut to 0.5% in early 2009 and have remained there. The government has borrowed £390bn in total in the last three fiscal years. After printing £200bn of electronic money, the Bank has decided that is not enough and has announced plans to do a further £75bn of quantitative easing. The image that springs to mind is of John Cleese's response when Michael Palin's pet shop owner insists that were the Norwegian Blue not nailed to its perch "it would nuzzle up to those bars and 'voom'".

"Voom?! Listen mate, this bird wouldn't voom if you put 4 million volts through it. 'E's bleedin' demised."

This is not the view of George Osborne or Sir Mervyn King, although both admit it is taking a while for the dead parrot to awake. King said last week that the UK was in the grip of a financial crisis at least as severe as that in the 1930s and perhaps the worst ever. The chancellor has repeatedly warned that it will take a long time to recover from the debt binge of the last decade. Most post-war recessions were caused by a tightening of economic policy in response to inflation, but that of 2008-09 was the result of individuals and banks borrowing too much.

Still, the mainstream view is that sooner or later things will get back to normal. Over the past two centuries, western economies have always bounced back from economic traumas, no matter how severe. It is taken as read that industrial capitalism is inherently robust and adaptable. It is perhaps time to challenge this assumption.

The first piece of evidence comes from the Office for Budget Responsibility, the independent fiscal watchdog created by Osborne when he became chancellor. Forec asting has been outsourced to the OBR, which expects growth to be quite perky in the years ahead, leading to a fall in the UK's budget deficit. Crucially, though, this is only because the OBR expects household debt to rise in the years ahead, from £1.6tn in 2011 to £2.1tn in 2015.

Alert readers will spot the circular argument here. Britain has a personal debt bubble that goes pop. Government steps in to clear up the mess and ends up with record peacetime debts itself. The cure for this is to get individuals borrowing again. Well, maybe. All the signs are that this will prove harder than the OBR imagines, resulting in weaker growth and a higher budget deficit.

This leads on to a second point, which is whether the UK variant of modern industrial capitalism is really as robust and adaptable as our policymakers would have us believe. The story of the past 25 years and more has not been of a new model of sustainable growth emerging from the old. Not since the mid 1990s has there been a period where the motor of growth has been production rather than consumption. For the rest of the time it has been the tale of asset-price booms, the withering of the productive base and the onward march of big finance. Following the bubble to end all bubbles, the taxpayer had to dig deep to bail out the banks and prevent an even deeper recession, pauperising the state in the process. A model that relies on excessive personal indebtedness and ends with the innocent suffering from extreme austerity seems neither robust nor adaptable, just bankrupt.

Britain has not been alone in its long march down this dreary road, but it has travelled further down it than any other developed western country. King and Osborne agree something has to change. The upbeat vision of the future goes something like this: Britain, despite everything, has a sizeable manufacturing base and can enjoy the benefits of a 25% drop in sterling since 2007. The UK has top-notch scientists who will deliver a new wave of innovation. It has an independent central bank that knows what it is doing and a Treasury determined to keep interest rates low. The banking system is being repaired. Credit will eventually start to flow again, taxes will at some point come down, consumers will pay off their debts and firms will start investing.

The dystopian vision of the future sees Britain displaying many of the traits of a developing country. Here's what a typical developing country looks like. It is governed by an elite and there is a gulf between rich and poor. The elite extracts economic rents from the rest of the population, then salts them away in tax havens. Developing economies often rely heavily on one commodity, which crowds out activity in other sectors. To the extent that they have an industrial base, it is as an assembly plant for foreign-owned transnational corporations. The country tends to be deficient in physical infrastructure and human capital. All too often the best brains leave the country.Now consider Britain. The country is dominated by the City, which exerts an extraordinary amount of political power. There is a widening gap between rich and poor. The rich find ingenious ways to avoid paying taxes. Large parts of the country are dependent on the public sector, while the private sector is increasingly dominated by financial services. Industry makes up a smaller and smaller part of the economy and not one world-class manufacturing firm has been developed from scratch since the second world war. Firms complain they can't find skilled labour. The infrastructure is a joke – witness the lack of snowploughs to keep Heathrow open during last winter's snow. This is not an economy that is going places: it is going south.

Bankers Say Put Reforms On Hold Until Markets And Economy Recover

Director general of Confederation of British Industry says ploughing ahead with overhaul would be 'barking mad'.












Angela Knight, the banks' lobbyist, warns implementing reforms from ICB report could derail economic recovery.

The head of Britain's biggest lobby group will urge ministers to shelve plans for a major overhaul of banking on Tuesday, warning that they would be "barking mad" to plough ahead with it while the economy is still fragile.

Moving too quickly to separate the retail and investment arms of banks, under plans to be unveiled by the Independent Commission on Banking in two weeks, could threaten the economic recovery by stemming the flow of credit to businesses, John Cridland, director general of the Confederation of British Industry, has warned.

"Taking action at this moment – this moment of growth peril, which weakens the ability of banks in Britain to provide the finance that businesses need to grow – is just, to me, barking mad," Cridland told the Financial Times.

Cridland's intervention comes a day after similar warnings from Angela Knight, the head of the British Bankers' Association (BBA) and will add to the pressure on the chancellor to slow down the reforms.

Sir John Vickers is poised to publish his final report in a fortnight's time and is expected to recommend ringfencing banks' retail operations from their investment banking functions. George Osborne will then decide whether and at what pace to implement any reforms, which are highly sensitive in coalition politics with the Liberal Democrats pushing hard for radical change.

Previous reports have suggested that the chancellor is considering radical ring-fencing, but over a lengthy timetable of up to eight years, mindful of the immediate impact on the economy.

Any suggestion of a delay would be furiously opposed by the Lib Dems. Last night, an aide to the business secretary, Vince Cable, said: "We don't want to pre-empt Vickers but we don't see that tremors in the market are any excuse to delay. We need the framework in place as soon as possible so banks recover on the right trajectory. We recognise it can't be done overnight."

In an apparent dig at the Liberal Democrats who are insisting the reforms go ahead, Cridland expressed frustration that the issue was being sidetracked by politics. "This was all about safer banks for a safer economy. It wasn't about politics," he said. "And I get a sense that there's a little bit of 'we'll do this because of political reasons'.

"We don't want to force some of our remaining world class British companies to shift away from a focus on the UK because the rules have been set unilaterally in the UK," he said. "There's an own goal here about to be scored if we get this wrong."

Knight argued that any reforms to come out of the Commission should be put on hold until the economy has recovered and taxpayers have been repaid for bailing out the banks.

"We have a high degree of uncertainty, market turbulence and lack of confidence that governments in other countries have got a sufficient grip on their economies. We are in for a very difficult autumn," she said.

"This is, therefore, the time to concentrate on economic recovery and paying back... the government and taxpayers. By all means think about new regulation but now is not the time to add that as an overlay with respect to costs, uncertainty or whether it is going to do anything beneficial anyway."

The Treasury said in a statement: "The government set up the ICB to ask the difficult questions that weren't asked before the crisis and this is exactly what the commission is doing. We look forward to receiving the final report on 12 September."