UK may face deeper decade of deflation than Japan
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The UK may be facing its own lost decade as the threat of worldwide deflation looms closer, according to Monetary Policy Member Adam Posen.
In a speech at the London School of Economics last night, Posen warned that asset price bubbles, large public debt, effectively zero interest, impaired financial institutions, and trends towards deflation emerging in some major economies - all issues currently faced by the UK - were all seen previously in Japan’s Great Recession.
But Posen warns that the UK may not have the tools to deal with such a crisis as Japan did throughout the nineties.
He says: “The UK worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. More active investors and greater openness in the UK than in Japan may be able to turn this around.”
This speech comes as markets continue to fall this week and investors begin a second ‘flight to safety’ in as many years.
Posen argues that while the UK has a more open global market than Japan’s, it is now facing poor prospects for external demand as the eurozone and the US continue to suffer economically.
He says: “The UK, US, and many Euro Area economies do now face this challenge simultaneously, which may limit the pace of, and our share in, the global recovery.”
Evolution Securities chief economist Ian Harwood argues that the current negative consensus amongst UK analysts and economists is overstated. He says industrial and business statistics are looking more positive and the UK’s export figures are on the up.
He says: “If world trade continues to expand – which I think will be the case – UK exports should do well, particularly given the competitive exchange rate.
“I’m doing my best at present to counter what I regard as unwarranted pessimism about the global economy. The outlook is by no means as bleak as many appeared to think and that the global economic recovery is sustainable. The inevitable fiscal tightening in the UK won’t be sufficient to slow, let alone derail, the burgeoning recovery. Indeed, I’m confident that UK growth performance will keep surprising by its vigour.”
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Readers' comments (7)
Michael White Emailmortgages | 25 May 2010 1:45 pm
Oh well, that’s that then, why bother to do anything positive, we are all for the scrapheap…….give me a break on this continuing negativity!
A good dose of positive sentiment can work wonders as we emerge from a recession; in this context my vote of confidence is with Ian Harwood and not the Harbingers of Doom, such as Posen. Yes I know he can produce a variety of facts and figures to support his conjecture; but that is all this is ‘conjecture’.
The problem is keep telling everyone they are destined to fail based on intellectual wrist-cutting hypothesis and they probably will.
Positive sentiment has never been more key to necessary UK growth performance.
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Leslie Squires | 25 May 2010 2:09 pm
Well done Michael, my thoughts entirely.
A great man once said "no matter what the economic future has to offer, lets treat the conditions as normal and move on". In not so many words when the going gets tough the tough get going.
Lets stop expressing doom and gloom and do something positive, it will have a remarkably good effect on our future.
Well done Ian Harwood, we need more people like you.
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Blair Cann | 25 May 2010 2:56 pm
Just a couple of weeks ago in this very outlet we were being told Japan is the place to be.
Our experts Vs your experts?
For what it is worth I have always thought the quickest way to get into a (secondary?) recession is to keep forecasting doom amd gloom. I have never heard of Adam Posen-who is he? What is his track record? Why should we listen to him and would we be doing so if he was not suggesting Armageddon was just around the corner? I just ask the questions....
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Steve Laird | 26 May 2010 10:27 am
At the end of the day, everyone is entitled to their opinion. In reality, no-one knows how things will develop from here as we have never, collectively, been in this big a mess before.
Rather than knock Adam Posen for being too negative (remember, he may actually turn out to have been too optimistic!) I think that we have to prepare our clients, as best we can, for all possible scenarios and adapt accordingly. We can , of course, do this in a very positive way.
However, simply adopting a positive mental attitude will not stop the huge job losses and tax rises that are needed to avoid financial implosion.
By most definitions, America is bankrupt yet their currency is appreciating almost daily - strange but true. Some say that gold is the answer - I say that you can't get shelter from it (unless you're very very rich) nor eat or drink it - so it's pretty useless really!
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James Taylor | 26 May 2010 11:32 am
good, if i sell my house now buy a camper van for a decade keep the rest of my money in a saftey deposit box i can buy my house or a better house in a decade time for half the money........
Yes it is a rediculous statement....although it is just as credible as the crap Adam Posen is coming outwith.
Confidence breeds confidence. If we didn't spent so much time as a nation trying to make people buy stuff they dont need and actually invest in peoples future,education. sport heathcare, the arts etc then we will never reach the next platau of evolution.
ok another red herring......
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Blair Cann | 26 May 2010 12:59 pm
..and yes of course everyone is entitled to their opinion and yes no-one really knows what the future holds but the main point is why a fairly obscure figure (sorry Adam) gets into the headlines of, eg Money Marketing with such an opinion; David Cummings, head of Standard Life UK Equities, issued today a statement that concludes "..things are getting better globally and domestically and corporate profits are improving. However market participants are are accentuating the negative.."
Too right they are. Can we expect a headline highlighting David's outlook? His opinion must be worth as much as Adam's but don't hold your breath....
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Nigel Tinsdale | 27 May 2010 9:24 am
If deflation is going to be such a problem then why did the Bank of England's own pension fund increase its weighting of index linked securities to over 88% last year?
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