Portfolio: Business
OPINION: JEREMY PEAT
jeremypeat@holyrood.com
Recession: the sequel
O
h dear; I am getting more and our lucky stars – and decent policy mak- etary policy way beyond usual limits is
more bearish about the economic ing – that recession has been avoided not enough.
and financial outlook for the UK – and for so long. A period of low or nega- Timing is the essence. The better
increasingly concerned that Scotland tive growth was inevitable – sometime. way out is to avoid getting into deflation
could suffer disproportionately. An ap- No, the real worries are how long this in the first instance; to be prepared to
preciation of this increasing downside is going to last, what will unfold in the risk some upside inflation risk to avoid
concern came while sitting the other day months ahead, and how we get out of even a minor risk of deflation. That
listening to participants in a seminar re- this mess. implies cutting interest rates early and
garding the Edinburgh City Region, and In making the 150 basis point cut the hard in the cycle (the road upon which
Jeremy Peat
preparing for my concluding comments. MPC confirmed their (belated) adjust- the MPC has embarked) and loosening
I saw no bright spots upon which I could ment to the view that risks to inflation fiscal policy beyond normal prudential
focus – just risks of doom and gloom for had switched firmly to the downside. We limits (as has happened already with tax-
an extended period. are still in a period when the Governor is cutting action to add to such pressures).
And this was before the dramatic required to write a series of letters to the Under the extreme circumstances we
news that the Monetary Policy Com- Chancellor apologising for CPI inflation face, I accept not only that interest rates
mittee had cut the repo interest rate by being above the top of its target range. must fall further – at whatever pace best
150 basis points – a full one and a half But that should be consigned to history. works to bolster confidence and sustain
per cent. This was a truly staggering and Some forecasters – respected ones – now some activity – but also that tax cuts pro-
wholly unexpected decision. My first believe that during 2009, inflation could viding real incentives to spend are now
reaction was ‘brilliant’, this is real proac- fall below the bottom of that range. appropriate.
tive policy making. But then another (this Fathom Consulting – a team consisting This time around, the UK recession
time nasty) thought crept through – what of really high calibre ex-Bank of Eng- story is complicated by the fact that the
do they know that we do not? The MPC land forecasters – suggests a CPI below problems are global rather than geo-
does not do dramatic. This is wholly out 1 per cent at the end of the third quarter graphically limited and also by the lack
of character. What is up? It was fasci- of 2009, with the RPI deep into nega- of liquidity further constraining activ-
nating to see the equity market reaction tive territory at -2.6 per cent. RPI infla- ity, with no early resolution in sight. We
mirroring this train of thought. First the tion has not been negative since 1943. need global macro-policy responses and
FTSE index shot up by 100 points or so, Fathom also points out that these down- a continuing constructive approach to
then – very quickly thereafter – it shot side inflation risks are priced into some the travails of the financial sector. The
down to below where it all started. parts of the financial markets. global responses are coming. US policy
The reason for being really worried This helps to explain the MPC is incredibly loose. Even the European
about the outlook is not just that the UK action. Members must have hurriedly Central Bank with its Bundesbank-like
is entering recession. We should thank come to the conclusion that they were approach is acting. The Chinese are well
way behind the curve and that deflation placed to provide a strong fiscal boost,
was a real risk. And deflation is a per- and continuing growth in activity there
nicious evil, which risks becoming self- will be of value to us all.
perpetuating as in Japan in the 1970s Provided there is no more dramatic
and 1980s. When prices start falling, financial sector news awaiting, then
then further falls tend to be anticipated. these cross-national efforts to rapidly
Hence demand, which is inevitably and significantly ease monetary and
already weak, falls further – as folk defer fiscal policy should suffice to limit the
purchases for consumption or investment damage to a year or eighteen months of
until prices are even lower. Each ratchet recession – and crucially, no decline into
to the decline in demand puts further deflation. But there is a huge but! We will
downward pressure on prices. The way exit recession with very low interest rates
out is to instil confidence that demand and a massive level of public sector debt.
will rise and prices will at least stabilise. Monetary and fiscal tightening will be
Sometimes, when policy action has been required – and the latter could be draco-
delayed as was the case in Japan, that is a nian and long-lasting. We are storing up
Herculean task and even taking interest problems for further out – another story
rates down to zero and loosening mon- for another time. HM
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www.holyrood.com | Holyrood magazine | 17 November 2008 |
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