Batten down the hatches for the mother of all recessions
Let's just call it Black Wednesday - another one. From all sides, we are now being warned of a recession deeper and longer than we feared even a few weeks ago.
This morning the National Institute of Economic and Social Research estimates that the economy shrank by one per cent between September and November. It says the rate of output decline is accelerating and that the recession is set to prove deeper than first thought.
"The Government faces the real risk", it warns, "that, despite the [stimulus] measures it took in last month's Budget, output will fall more sharply than it expected to the end of next year.
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"The main problem that it needs to address very urgently is the availability of bank credit, and further interest reductions are unlikely to have much effect."
So much for the government's £20 billion stimulus package intended to soften the impact of recession.
The warning comes on top of a bleak forecast from the Organisation for Economic Co-operation and Development (OECD) last week that the UK faces a "severe" economic downturn in 2009.
The Paris-based body predicted that economic output in the UK will fall by 1.1% next year, more than any other major G7 country.
It added that unemployment in the UK will likely rise significantly to over 8% by end of 2009 from 5.5%.
Bleak though these warnings are, they are not the worst that are doing the rounds. Howard Archer, economist at Global Insight, says he expects the UK economy to see further substantial contraction in the first half of 2009 and that it is unlikely to see any growth until 2010. "Consequently, we forecast GDP to contract by 2.0% in 2009 after expanding by just 0.7% in 2008."
Most now expect that interest rates will be brought down to near zero levels in the next two months. But the chilling response is - what difference will it make? Banks lack both the wherewithal to lend and the confidence as business failures and receiverships mount by the week.
Last night Bank of England Monetary Policy Committee member Andrew Sentance warned that the UK is now facing a recession of a similar scale to the three major slumps that have afflicted the UK since 1945. and that the the slump had deepened since the publication of the Bank of England's Inflation Report.
Despite the VAT cut, consumers will face serious pressures for an extended period, and will be particularly hit by sharply rising unemployment in 2009. Indeed, unemployment seems likely to reach 3 million by late 2009 or early 2010 on the International Labour Organisation measure.
And the past 24 hours have brought bleak news on the global scale of the recession. Electronics giant Sony is cutting 8,000 jobs and mining colossus Rio Tinto Zinc 14,000as it slashes capital spending.
The Washington-based World Bank said last night that even as things stand, growth next year will be the worst since comparable records began in 1970. It added that the time had come for policymakers to contemplate an even worse outcome. Countries both rich and poor will suffer a slump of unprecedented scale.
Is there any chink of light at all in this deepening gloom? Just one - a significant fall in the US long term fixed mortgage rate, triggered by the fall in the US Treasury bond yield below three per cent, has sparked an upturn in mortgage demand. If this gathers pace, it could see the beginning of an upturn in housing demand and a cut in the huge overhang of unsold homes in the US next year. This epochal crisis began in the US housing market. And that is where it is likely to end. But it will take years before we see any return to "normal" .
