Economists warn of doom and gloom

The recession will be considerably longer and deeper than the Treasury has forecast, according to a majority of economists polled by the Financial Times.

Their views contrast with the Treasury and the Bank of England’s relative optimism in believing the economy will start to grow reasonably strongly in the second half of the year. Only a small minority of economists are confident that the green shoots of recovery will be visible by the end of this year.

Doom-mongerers include Michael Saunders of Citi, who says the UK is “in one of the worst recessions …. in the last 50 years”. He is joined by Simon Hayes of Barclays Capital, who says: “It will probably be the closest experience to the Great Depression since the Great Depression.”

Malcolm Barr of JPMorgan thinks that by the end of the year, “rather than perceiving green shoots we will still be worried about ongoing fragility and the possible exhaustion of policy tools”.

The list of problems is long with the banking sector shocks yet to make their full impact felt in the real economy. Pressure on financial companies to sell assets in a declining market is expected to continue. Huge levels of stock are building up and business investment intentions are extremely weak.

Rapidly rising unemployment will reduce aggregate household incomes while the financial dysfunction will serve only to weaken policies aimed at boosting demand, warn economists.

Most expect these features to dominate 2009, leaving little room for signs of recovery, although both Stephen King of HSBC and Jonathan Loynes of Capital Economics think the seeds of recovery might have germinated by then even if the shoots are not plain for all to see.

A significant minority expect the authorities’ action in stimulating demand to have some effect in limiting the recession. DeAnne Julius, of Chatham House and a former member of the Bank’s monetary policy committee, expects a weaker sterling and looser policy to begin to work by mid-year. “The year ahead is a case of gloom, but not doom,” she adds.

Of the 18 who agree with her, many think the recovery this year will be faltering. Howard Archer of IHS Global Insight says the signs of life “will likely be mixed in with some still pretty poor data”. The end of the value added tax reduction period is seen by some, such as Keith Wade of Schroders, as a spur to spending at the end of the year.

But for all the caution and gloom there are some optimists, such as Julian Le Grand of the London School of Economics, who says: “There is a real possibility that the whole thing has been overstated.” He is joined by Mike Wickens of York University, who notes that economic growth can turn round quickly.

But the overriding sense from the economists is of uncertainty, partly, as David B. Smith of University of Derby and Beacon Economic Forecasting argues, because most economic models take little or no account of credit so “the entire model-building community is flying blind”.

Alan Budd, the former chief economic adviser to the Treasury, gave the most succinct and perhaps the most honest answer, simply saying “don’t know” to the question of when recovery will start.

By Chris Giles
Published: January 1 2009 22:01 | Last updated: January 1 2009 22:01

Source: Financial Times

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