The Monetary Policy Round Table, made up of economists from the Bank of England and the Centre for Economic Policy Research warned that once the UK comes out of its recession it may be as long as eight years before consumers begin borrowing and spending. They compared the UK’s possible problems with those of Japan, which is still to emerge from what economists call the “lost decade” after its economic crash in the nineties.
The report from the round table said that some participants believed that the UK recession would lead to a protracted period during which consumers would be averse to borrowing and would seek to reduce their debt leverage.
It said: “Participants pointed to previous episodes of significant balance sheet restructuring – in the United Kingdom, Japan, Sweden and Thailand – which had lasted around six to eight years, although the unprecedented nature of the current recession limited the insights from these historical comparisons.”
Other participants disagreed and were confident of a turnaround in consumer activity – they argued that most savings over the recession had been channeled into a further accumulation of housing assets, a fact corroborated by the recent rally in house prices. But the optimists conceded that this would not be a speedy process.
The report said: “A recovery in the supply of mortgage credit would likely lead to a reduction in the savings rate, and hence slow the deleveraging process. That, however, would also take time – the banking system remained significantly impaired, and although banks had begun to repair their balance sheets, significant further adjustment was required.”
The round table was split on the subject of quantitative easing – while some were confident that the £200bn injection had helped the economy avoid a depression others argued that there was scant evidence to show that the stimulus had helped the real economy.
Participants also noted that the fiscal plans outlined in December’s pre-Budget report contained “little news about the timing, composition and extent of any further consolidation in the public finances”.
It said: “Many thought that the PBR projection of a sharp rise in public sector debt relative to nominal GDP would leave little headroom for any further fiscal expansion.”