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The R word

Alastair Darling did not dare say it. The Bank of England has not dared yet either. But the OECD has stomped where the Chancellor and the Bank fear to tread.

Yesterday the Organisation for Economic Cooperation and Development forecast recession for the UK this quarter and next - i.e. now.

The recession will not officially be identified until next year, of course. In UK economic circles a recession is defined by a contraction in two successive, three-month periods.

This definition is not an iron law and you can pick another - rather like the inflation rate. The official rate is defined by the government's Consumer Prices Index, which provides a fairly limited guide to what is happening to prices. Check the official rate against your quarterly supermarket or fuel bills if in doubt.

So the OECD says the UK's economy is shrinking as we shelter from the current downpour and will suffer a sharper decline in October-December.

Combine this with Darling's astonishing suggestion at the weekend that Britain faces potentially "the worst economic conditions in 60 years" and you will understand the plunge in the pound against the euro. You may even think you would rather be in New Orleans.

We already know the economy stagnated in April-June and grew just 0.3% in the first three months of the year - the Office for National Statistics has told us.

Last week, the CBI reported the retail sales figures for August were the worst in 25 years. The Office for National Statistics did not tell us that - its most recent figures suggested a small recovery.

We are in dangerous territory when economists do not trust government figures. Yet Darling has been roundly ridiculed for his comments.

Britain clearly is not experiencing its worst economic crisis in 60 years - although why Darling chose 1948 for the comparison is beyond me. There was still rationing in 1948, but this was the year the NHS was founded and the Marshall Plan was in swing across Western Europe - not signs of deep crisis. Did he simply wish to avoid saying "for 75 years"?

It is not even clear yet that this is the worst economic crisis since the early 1980s. The situation is almost certainly worse than the early 1990s.

However, possibly the most disturbing of Darling's comments attracted less attention. It was his warning that the downturn could be "profound and long-lasting". The Chancellor was basically saying - 'whatever the government does, things will get worse for the foreseeable future'. 

Can it be only a fortnight since the British Chambers of Commerce was solemnly warning that the UK may enter a technical recession in six to nine months? "We expect growth to be slightly negative or zero," said the BCC.

Most economic forecasts tend to be over-optimistic - sometimes hopelessly so - although the British Chambers of Commerce appears more hopeless than most.

Darling has not endeared himself to anyone, but it least he was fairly honest. Reshuffle anyone?

 

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This page contains a single entry from the blog posted on September 2, 2008 12:02 PM.

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