You know an economy is really in deep trouble when the head regulator (make that head coach) invokes sport to try to explain Britain’s second slide into recession in two years. And so it was with Britain overnight when the head of the Bank of England, Sir Mervyn King, reached out and grabbed the record Olympic performance of Team GB to try to explain the continuing sluggishness and forecasts of more to come for the next three years.
“Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness. But it is slowly healing … As I have said many times, the recovery and rebalancing of our economy will be a long, slow process. It is to our Olympic team that we should look for inspiration. They have shown us the importance of total commitment when trying to achieve a goal that may lie some years ahead,” Sir Mervyn wrote in his opening remarks to the latest inflation report from the central bank.
To many in the markets, and no doubt in the rest of the country, the economy has yet to lift from a slow crawl in the five years of the crisis. Certainly the data says it is in reverse, for a second time since the GFC erupted in August of 2007.
It’s easy to see why Sir Mervyn used the Olympics analogy: Team GB has had a very positive impact on UK sentiment. That’s in contrast to the latest economic forecasts from the central bank, which are miserable, rotten in fact, offering very little hope of growth this year and an very uncertain outlook.
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Sir Mervyn told a press conference that: “We will get back to the same growth rates we experienced before the crisis … but it’s quite impossible to know over what time period.” He said no one could predict how the eurozone crisis would unfold and that the Monetary Policy Committee of the bank could not be sure how long the UK would suffer from weak productivity. For a coach who has always seemed very certain about a lot of things, it wasn’t a PB for the governor who is due to retire next year.
In the most newsworthy part of the latest inflation report, the BoE now sees UK growth in 2012 being flat after forecasting a rise 1.2% in the May inflation report. So no growth at all over the 12 months to December. After a dip of 1% in the first half, the BoE sees growth of 1% over the next two quarters, which raised eyebrows among commentators. Growth next year is seen at 1.5% annual, down from 2% forecast earlier this year. The only positive was that inflation will fall back to around 2% from more than 5% a year ago as the lack of activity in the economy and euro crisis restrains price pressures.
And, the BoE’s Monetary Policy Committee said the economy would probably grow about 2% a year in two years, which would be under the UK’s long-term average growth rate and much lower than its 2.7% prediction back in May.
But some analysts reckon the bank is still being too optimistic. Several told London newspapers they saw the economy contracting by up to 0.5% over the year to December, with a slide into negative growth in the final quarter because of the drag from the euro crisis and recession. And they said the B0E has a weak forecasting record. They pointed to the forecast in the August, 2011 inflation report, that the UK economy would “recover modestly during the second half of 2011 and beyond”. Since then there has been one quarter of growth and three, in a row, of contraction.
Except for the quite pertinent fact that the UK is a AAA-rated economy with a credible government, and its own currency (and outside the eurozone), the latest growth estimates and the general gloomy tone wouldn’t seem out of place next to reports in recent days from the likes of Italy and Spain in the heart of the wobbling eurozone.If anything, the latest reports from the eurozone suggest current recession is slowly deepening. The Italian economy contracted by 0.7% in the June quarter, according to an early estimate from Rome. That’s worse than the 0.4% slump in Spain. German imports fell and exports in June to the eurozone fell sharply. Industrial production in Germany, Spain, Italy and the UK fell and is down sharply from a year ago as the recession tugs economic activity lower. Germany looks increasingly sluggish. Industrial output was down 0.9% in the month after a 1.7% jump in May.
But German output is now down 0.4% so far this year, after rising strongly in 2011. Exports fell 1.5% in June and and imports fell 3% in June (helping the trade surplus widen). That’s a clear sign of the extent of the slowdown in Europe’s most important economy.
The Italian economy not only contracted last quarter, but production fell by 1.4% in June, but is now down more than 8% from June last year. That’s worse than Spain (which saw its economy fall by 0.4%), which also reported a nasty 6.3% plunge in June from the same month last year, the 10th monthly fall in a row. In the Netherlands, which is the euro zone’s fifth-largest economy, industrial output fell by 0.6% in June from May. But Ireland was a rare bright spot with output up 3.3% in June was May and 10.5% from June of 2011.
Another bright spot was the move by Fitch to reaffirm Germany’s AAA rating with a stable outlook, meaning only Moody’s has the country on a negative outlook. But while expressing confidence, Fitch did warn that Germany remains exposed to the systemic component of the euro crisis:
“A significantly deeper recession of its large eurozone trading partners could also push Germany into recession with negative repercussions for the fiscal stance as well. Furthermore, additional sizeable contribution to eurozone bailout funds, on top of the EFSF guarantees, could push German debt level above 90% of GDP, close to the upper limit Fitch generally considers consistent with a AAA rating. Materialisation of these risks would put downward pressure on the rating.”
Could that pressure emerge again from Greece, and not the current favourites, Spain and Italy? Greece is slowly moving back to centre stage as a gold medal contender for the next flare up. It’s already-tattered credit rating put on a negative outlook by Standard & Poor’s, only hours after the government said it was still €4 billion short of getting the required €11.5 billion of spending cuts. There’s now talk of more public servant sackings which is causing new problems for the coalition government.
Greece raised €812 million in short-term money overnight, which will help pay a €1.6 billion short-term debt due next week, with a €3.2 billion bond due on August 20. There’s still time for the country to default before the crisis ramps up again in September.