Wednesday, 1 April 2009

UK has run out of money to pump into economy, OECD warns

**Thinktank urges Bank of England to hold interest rates near zero until end of 2010 **Predictions include UK economy shrinking by 3.7% this year and unemployment hitting 10%
**Quantitative easing plan wins backing

The UK government cannot afford to pump more money into Britain's struggling economy, the Organisation for Economic Cooperation and Development warned today, piling further pressure on Gordon Brown ahead of the G20 summit in London.

Echoing comments made by the Bank of England governor, Mervyn King, the OECD said Britain's worsening budget deficit meant the government had little room to cushion the impact of the recession if it turned out to be deeper than expected.

The government is already expected to have to borrow at least £118bn in 2009 to balance the books - equal to 9% of gross domestic product, an all-time record.
"The room for additional fiscal manoeuvre to respond to worse-than-expected activity developments is therefore limited and new measures would need to be accompanied by detailed and credible fiscal consolidation plans in order to ensure that confidence is not eroded," the OECD said.

The Paris-based thinktank urged the Bank of England to hold interest rates near zero until the end of next year to support the economy.

Until last week, the prime minister, Gordon Brown, appeared determined to announce a new stimulus package in the 22 April budget, but he was forced to backtrack after King warned against a giveaway.

Opposition politicians seized on King's warning to intensify the pressure on Brown, who is chairing the G20 summit to coordinate international steps to tackle the global economic crisis.

For now, Britain is implementing a discretionary fiscal stimulus worth 1.4% of GDP, on top of increased spending on social benefit payments.

The Bank is also creating £75bn to buy government bonds through a quantitative easing programme to boost growth and stave off deflation, which the OECD said could turn out to be more successful than expected.

"Monetary and fiscal policy could provide a stronger stimulus to growth, although the magnitude of their impacts, especially that of quantitative easing, are currently difficult to gauge," the body said.

The OECD is predicting the UK economy will shrink by 3.7% this year, the sharpest rate of decline since the second world war, and by 0.2% next year, although a recovery should start later that year. Unemployment is likely to peak at 10%, up sharply from the current 6.5% rate.

"While the OECD projections make depressing reading, we suspect they may even be a little on the optimistic side," said Howard Archer at IHS Global Insight, who thinks the economy could suffer a 4% contraction this year and a further one of 0.4% next year.

The OECD's forecast for British growth is slightly less grim than that for other big economies. It predicts the United States will contract by 4%, the eurozone by 4.1% and Japan by 6.6%.

It said that governments may be able to justify more spending in certain circumstances. "If economic circumstances deteriorate significantly more than projected, further fiscal measures would be warranted," it said in the report.

The OECD fears the world's 30 richest countries face a combined jump in unemployment of 25 million people in the current economic crisis, by far the biggest and swiftest rise in the post-war period.

Ratings agency Fitch also issued a grim forecast today. It downgraded its previous forecasts for economic growth in 2009 and is now predicting the "widest and deepest global recession" since the second world war.

Source: Guardian

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