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Tuesday 4 December 2012

New Boss of the Bank of England Cannot Create Miracles in UK Economy Falls into Double-Dip Recession

UK Economy Falls into Double-Dip Recession

New Boss of the Bank of England Cannot Create Miracles. Four years after the Great Crash, UK economy falls into double-dip recession

The appointment of Mark Carney – current Head of Bank of Canada – as the first non-British governor of the Bank of England in its 300-year history has received near-universal praise. But can this 47-year-old former Goldman Sachs veteran of 13 years remedy the ills of a struggling British economy?   

Four years after the collapse of Lehman Brothers sparked the greatest financial crisis and economic downturn since the Great Depression, none of the underlying contradictions of the world economic system has been resolved. Global imbalances and deep-rooted tensions have deepened even further, the financial and economic crisis and the outlook looks pretty bleak. Hundreds of billions of dollars have been made available to save the banks and financial houses around the world.

Governments and central banks took off the books of the banks, the worthless or so-called toxic assets were now transferred to the states’ budgets. The bailout operation, like other similar measures like quantitative easing, has cost more than 25 percent of global GDP. This large-scale bailout rather than solve the problem, has increased the volatility of the system. World stock markets hit their lowest level in 2012 as poor US jobless figures and weak manufacturing data from Europe sparked renewed fears of a global slowdown.  Recently, the World Bank warned that Europe runs the risk of sparking a Lehman-style global crisis that will have dire consequences for all Western economies.[1]  Four years since the start of the economic downturn, it is becoming increasingly clear that a new period of intensified crisis is gripping the global economy.

Far from easing the dire crisis conditions and introducing careful investment policies, governments of the advanced economies, in line with the international financial institutions, are now implementing sharp austerity programmes on a scale not seen since the 1930s. Everywhere in the Western world there is unemployment, foreclosures, bankruptcies, depressed housing market, and no recovery in sight. Already, in many advanced economies the highest number of people since the 1930s are now jobless or unable to find full-time work.

Austerity measures are wrecking the UK economy

Since 2008, the British government has pumped more than 375 billion pounds into the banking system through bailouts and a series of ‘unconventional’ measures, but very little of this has flowed back into the real economy. This figure is almost half of the declared total public deficit.

The agreement between the Conservatives and the Lib Dems provided the government carte blanche to balance the budget with massive cuts in public services, jobs and wages. The scale of the Coalition government’s intended austerity measures are on a scale never seen in modern Britain. What is planned here will dwarf anything that was undertaken by Thatcher in the 1980s. There is already massive unemployment in the public sector. As a realistic estimate, 750,000 public sector job losses do not look far off the mark.[2] And those still in work suffer wage freezes and cuts. Job insecurity has risen for nearly everyone. Massive unemployment and lower wages mean lower tax receipts, and even bigger budget deficits and debt loads. Austerity and high unemployment also risks social unrest. Greece has already lost control of its streets, and a number of other eurozone countries are moving in that direction.

It is very unlikely that the introduction of  savage austerity measures while the economy is still on downward spiral will resolve any problems– the crisis does simply get displaced from one sphere to another. The austerity measures of the UK Coalition government are therefore damaging any potential growth prospects, and are increasing the possibility for a longer and deeper crisis.  Indeed, according to the figures released by the UK Office for National Statistics (ONS) in May 2012, the British economy entered a “double-dip” recession for the first since the 1970s.[3]  ‘Double dip’ is where the economy goes back into a recession before it has had a chance to recover its previous high of economic output.   And all this is not helping the budget either– according to the National Institute for Economic and Social Research (Niesr), fiscal consolidation in the UK is increasing the UK’s debt burden.

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