UK economy faces prospect of 'lost decade'
A FORMER Bank of England interest rate-setter has warned that Britain is in danger of sliding into a 1990s-style Japanese ‘lost decade’.
Although recent data suggests we are moving away mercifully from a 1930s-style Great Depression instead, Sushil Wadhwani’s comments takes the icing off that particular cake.
If his scenario was correct, the British economy would suffer from a very extended period of stagnation or tepid growth.
Rather than any Apocalypse Now initially brought on by the banking collapse, it would be economic enervation through a decade.
When the Japanese asset bubble burst in 1990 it did not lead to an economic implosion in that country or social disorder.
Instead, there was just a succession of new political administrations and fiscal and monetary adjustments by the authorities that failed to stimulate the country for more than a decade.
That included Japan’s central bank cutting interest rates to virtually zero at one stage to try and stimulate a supine economy. Even that didn’t work.
>To show the similarity with Britain, our interest rates are currently at just 0.5 per cent.
Even now, with the worst of the 1990s stagnation behind it, the Nikkei index of the Japanese stock market is at just about 10,400 compared with a high tide mark of 39,000 in 1989.
Admittedly, the Japanese government did not do anything as radical as pump £175m into the economy by buying up bonds and risky assets as our own Bank of England has just done.
But former Monetary Policy Committee member Wadhwani’s worry is that after a brief bounce next year, Britain could relapse again. Perhaps not into a new recession, but to just limp growth that will make the average man in the street wonder what precisely what the difference is between recession and virtual stagnation.
Most economists believe the current climate of low interest rates here could give way to higher rates in the second half of 2010 _ perhaps blighting in the bud any tentative economic recovery in the first half of next year
Also, Wadhwani says, temporary boosts like businesses restocking and the VAT stimulus (did anyone really notice the latter?) will give way to the down cycle again.
And if deflation raises its head that could deter both consumer and business spending.
It is a bleak scenario. And one unlikely to give much satisfaction that we could all feel worse off by a process of vague attenuation over a decade rather than through some much more extreme, but transient, downturn lasting a few years, typified by the mid-1970s and early-1980s recessions.
