Britain's Recession
December 23, 2008
U.K. GDP sank 0.6% not annualized last quarter, five times faster than U.S. GDP. Such was the worst outcome in 71 quarters yet will look mild compared to what fourth-quarter and 1Q09 figures are likely to show. British personal consumption (-0.2%) was very resilient in comparison with its U.S. counterpart, but U.K. investment (-2.8%) was hammered. Having an undervalued and thus competitive currency also helped the United States, whereas Britain was still coping with an overvalued exchange rate, which has since shifted substantially. The pound is 16.3% below its end-September level on a trade-weighted basis, but it will take time before that stimulus is felt especially against the backdrop of a global and Euroland recession.
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The U.K. drop in GDP last quarter was led by a 1.6% decline of manufacturing and a 2.1% drop in distributive and business services. British labor productivity, output per manhour, fell by 0.4% from 2Q and 0.2% from a year earlier, its first on-year drop since 1989. The current account deficit was smaller than forecast but amounted to 2.1% of GDP nonetheless, up from 1.8% in the second quarter and 1.0% of GDP in 1Q08. The previous cyclical peak in the Bank of England key rate was 5.75%, 50 basis points above the Fed’s peak level. The Fed funds target of zero-0.25% now represents the end of the line and is just enough to maintain an ember of a Fed funds market that will be needed when it’s time to normalize monetary policy. The Bank of England rate of 2.0% now did not keep up with the falling Fed Funds rate. The U.K. rate ought to be effectively zero but is unlikely to get lowered to that level in a single move, meaning that in February, the Fed will still have two month’s lead time over the Bank of England in doing what needs to be done to combat a very serious recession and potential deflation. As gloomy as the U.S. economic forecasts are, those for Britain generally call for a bigger decline of GDP with good reason.
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