In a speech to the CBI and local business groups in Leeds last night, Mervyn King became the first big economic policy-maker to use the dreaded ‘r’ word: ‘It now seems likely that the UK economy is entering a recession,’ he told the assembled bigwigs, an admission that will presumably come as no surprise to anyone. However, he also offered some reasons for optimism: he believes the bank recapitalisation scheme will prove to be the turning point, and the UK economy will now slowly recover. ‘The long march back to boredom and stability starts tonight in Leeds,’ he insisted.
As ever, King provided a clear and elegant explanation for the ‘financial turmoil’ that has gripped the markets in the last year. He suggested that the worst of the crisis had been precipitated by the collapse of Lehman Brothers in September, which sparked ‘an extraordinary, almost unimaginable, sequence of events’, culminating in the huge state bail-outs around the world. ‘It is difficult to exaggerate the severity and importance of those events,’ said King. ‘Not since the beginning of the First World War has our banking system been so close to collapse'.
There are causes for cheer, he insists: the recapitalisation plan will eventually get banks lending to each other again (albeit not at 2007 levels), while the huge recent falls in the oil price will also help to boost real incomes. But there’s more pain to come in the short term, particularly in the housing market – indeed, the latest estimates from the National Institute for Economic and Social Research today suggest the UK economy will contract by 0.9% in 2009 (that’s four successive quarters of contraction, two more than we need for a recession). Banks will also suffer as they start pursuing a ‘rather boring’ monetary policy.
Speaking of boring, we also learned a little more about King the man last night. He began his speech with a lengthy cricket anecdote; apparently in 1958, inspired by his first trip to see Test cricket at Headingley, he took up slow left-arm bowling. His headmaster, who doubled as a bowling coach, would pay him a farthing every time he managed to pitch the ball on a certain spot – but the better he got, the shorter the sessions became. This, says King, taught him his first lesson in economic moral hazard. He must have been the life and soul of the party at school...
King’s admission may not have been much of a shock, but it hasn’t done the pound much good this morning. With the Governor warning that falling commodity prices would send inflation tumbling, it looks inevitable that the recent half-point interest rate cut will be followed by more cuts in the coming months. This in turn has led to a big sell-off of the pound, which fell to a five-year low against the dollar this morning. Bad news if you were planning a holiday in Florida next year...
In today's bulletin:
King readies the troops for a long march
Dealing with the downturn
Lehman CDS crisis: A Complete Damp Squib
Entrepreneurs plan to grin and bear it
MT's Little Ray of Sunshine: (No) Panic Room