Government austerity measures risk sending UK into recession argues Legal & General Investment Management (LGIM).
12 October 2011
In today's Fundamentals briefing, Legal & General Investment Management (LGIM) Economist, James Carrick, argued that government growth forecasts are too optimistic and warned the economy remains at risk of falling into recession.
"Despite announcing the harshest austerity plan since the Second World War, the government has been predicting a steady economic expansion. We explained back in July 2010 that this implied the biggest private sector boom ever and warned that was not possible given tight credit conditions, the fact that interest rates are already extremely low and the problems building in Europe. Instead, we highlighted the risk of the UK tipping back into recession. Unfortunately recent data have confirmed our fears with private sector activity stalling and unemployment rising." James said.
While Chancellor Osborne has come under increasing pressure to slow or reverse the government's austerity programme in order to boost the economy, fear of a Greek-style crisis has kept the government focused on reducing their deficit. In today's presentation, James highlighted three possible scenarios facing policy makers, arguing that no matter which path is chosen, LGIM's analysis shows government debt continuing to rise, leading to the possibility of the UK's credit rating being reviewed in coming years. While the recent announcement of further quantitative easing (QE) provides some support to the economy, according to James, the effectiveness of further QE coupled with harsh government austerity measures remains highly uncertain.
"Regardless of whether austerity continues or not, government debt is likely to remain on an explosive path. If the government is reluctant to increase spending, the Bank of England should continue its QE programme. However, our view is that this would be far more effective if it were to coincide with an expansion in fiscal policy as it is unclear how quickly quantitative easing will feed through into increased private sector activity". James said.
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