The last time interest rates were cut to 2% was in 1939, said Gary Duncan in The Times. “Now, as then, Britain faces an economic blitz.” The latest data have been grim across the board. The housing market downturn is the fastest on record, with prices down by 16% over the past year, according to Halifax. As the wealth effect dwindles, overindebted households are cutting back.
New car sales plunged by an annual 37% last month. The British Retail Consortium reports that year-on year retail sales fell in both November and October, marking the first consecutive monthly declines since the group began compiling its index in 1994. Retail consultancy Verdict forecasts a contraction in high-street spending from 2009 to 2013, saying that consumers have yet to appreciate the scale of the recession.
Rates to fall even further
That scale was underlined by the news that industrial production fell by 1.8% in November, the eighth consecutive monthly fall – making this the worst stretch since 1980. The annual fall was 5%, not far off the 7% drop during the entire 1990s recession, noted Capital Economics, which reckons that all this “dreadful news” points to a fall in GDP of up to 2% next year. Given the rapidly deteriorating data and the prospect of a recession considerably worse than last time, it’s no wonder a base rate of 0% “is no longer seen as improbable, or even unlikely”, said Gary Duncan in The Times. We shall no doubt also be hearing a great deal more about Fed-style quantitative easing in the months ahead.
Will that help?
But further rate cuts are “unlikely to have much effect”, as the research institute NIESR said: it’s the availability of credit, not the price, that’s the problem. The Government is urging the banks to boost lending, but they are still facing funding difficulties with the wholesale markets gummed up and are concentrating on shrinking their overstretched balance sheets and avoiding losses caused by the downturn. Moreover, “even if the banks could be persuaded to reverse the deleveraging process”, demand for credit is set to shrink as households hunker down and rebuild their savings, said Jeremy Warner in The Independent.
Since monetary policy isn’t working, it’s especially unfortunate that Britain’s fiscal stimulus, the VAT cut with no chance of making an impact, was so feeble. Worse, there is no scope for more as the budget deficit is rocketing towards 8% of GDP and public debt is set to increase by 20% over the next few years. It seems there is no way to reflate an economy, which, as Warner said, “in truth requires a cathartic period of adjustment after a long credit-fuelled boom”.