The 'ghost of crisis past' stirs in Britain

Things could get worse than that, said Michael Prest on Breakingviews. "The ghost of crisis past is stirring in the UK."

"No one at the Treasury or Bank of England is remotely concerned about inflation now," said Julia Finch in The Guardian. The CPI measure fell back from 4.1% year-on-year in November from 4.5% the previous month, while the older RPI measure, which takes account of plummeting house prices, dropped to 3% from 4.2%. Deflation looms; interest rates "are likely to go as low as 1%, or even zero over the coming months".

Other data also support the case for "aggressive" cuts, said Vicky Redwood of Capital Economics. Take the PMI survey, which points to "manufacturing output contracting at an annual rate of over 12%". Mortgage approvals are 75% down on their peak, in line with annual house price falls of 20-%25%, while unemployment rose at the fastest pace since 1991. "The recession appears to be deepening"; expect GDP to fall by 1%-1.5% in both 2009 and 2010. Back to 1976?

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Things could get worse than that, said Michael Prest on Breakingviews. "The ghost of crisis past is stirring in the UK." In 1976, Britain had to be bailed out by the International Monetary Fund in a "humilating" rescue and the parallels between then and now are disturbing. A budget deficit of 8%-9% of GDP, an orgy of borrowing in the private sector and a pound that had collapsed by a third in two years. Meanwhile, the current account deficit is twice as large now as it was then. Inflation may actually be the only good news; in 1976 it was out of control at 25%. The solution then cut public spending, encourage investment, boost export industries may be needed again. But it will be painful, especially with tools such as import and currency controls no longer available. "The 1976 crisis discredited the Labour government ... the present [one] could find itself in the same bleak position."