Tags: Blanchflower | UK | Desperately | Danger | Renewed | Slump

Blanchflower: UK ‘Desperately in Danger’ of Renewed Slump

Monday, 18 Oct 2010 08:36 AM

A Bank of England stimulus expansion appears to be finance minister George Osborne’s “only” backup plan as government spending cuts risk a renewed recession, former policy maker David Blanchflower said.

“We are desperately in danger of a double dip and the last thing you do in a recession is make things worse,” Blanchflower said in an interview today on Bloomberg Television. “The BOE unfortunately looks like the only ‘plan B’ the government has, but quantitative easing just doesn’t act fast enough.”

Policy makers have split three ways on the risks to the economy and whether to raise stimulus, maintain it or start withdrawal. The Centre for Economics and Business Research said yesterday that the Bank of England will expand its bond-purchase plan by 100 billion pounds ($159 billion) as Britons brace for the deepest budget squeeze since World War II.

“This looks like it’s going to turn the economy right down and I think it’s going to be a terrible, terrible mistake,” Blanchflower said, referring to the budget squeeze. “My fear is that” the first quarter of next year “is really going to look terrible.”

The CEBR’s forecast for economic growth in the first three months of 2011 is 0.1 percent, which implies there is almost a 50 percent chance the economy will contract during the quarter, according to the report yesterday.

‘Soft Patch’

Ernst & Young LLP’s Item Club, which uses the same forecasting model as the U.K. Treasury, also predicted today that the economy faces “a soft patch” before it “gradually” picks up momentum. Gross domestic product will rise 1.4 percent this year, and 2.2 percent in 2011, the group said.

The central bank will keep its benchmark interest rate at a record low of 0.5 percent until at least “late” 2012 to aid the economic recovery, the CEBR said yesterday.

The Bank of England maintained its stimulus plan at 200 billion pounds this month and will next meet on Nov. 4. Chancellor of the Exchequer George Osborne will announce details of his spending cuts on Oct. 20.

“Clearly you have to deal with the deficit, but there is no economics that says you have to deal with it in a week or a year,” said Blanchflower, who is a columnist for Bloomberg News. “You have to be mindful of the data and if the data turns down, which they have, you have to adapt.”

Blanchflower’s three-year term at the Bank of England ended in May 2009. He is an economics professor at Dartmouth College in Hanover, New Hampshire.

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A Bank of England stimulus expansion appears to be finance minister George Osborne s only backup plan as government spending cuts risk a renewed recession, former policy maker David Blanchflower said. We are desperately in danger of a double dip and the last thing you do...
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Monday, 18 Oct 2010 08:36 AM
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