US downturn leads the way for Britain
The US economy is in trouble - and not just the housing market. With low growth, concerns over inflation and public finances in a mess, things look bad for Britain.
The good news from America is that the world's largest economy may suffer "only a mild recession and sluggish recovery", said Gerard Baker in The Times. The bad news? For all the fashionable chatter about decoupling, "the crisis in Britain is unfolding along remarkably similar lines to the one that has engulfed the US", with Britain six months to a year behind.
The housing market crisis is now well established; prices are down by 5% from their peak on the Halifax index and another set of soft lending numbers this week demonstrate "plenty of scope for further house-price falls in the months ahead", said Capital Economics.
But "it's not just the housing market that's in trouble; the wider economy is suffering too," said The Economist. The Bank of England forecasts growth of just 1% over the next year. Meanwhile, inflation is expected to hit 3.7% next year one of two reasons why the slowdown here can be expected to be more severe than in America, said Baker. Unlike the Federal Reserve, which has slashed interest rates to ease the pain, the Bank of England is constrained by its inflation target it "cannot risk rate cuts on the same scale".
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Public finances on the rocks
The second difference is the worse state of public finances. After the Northern Rock fiasco and the 10p tax-band disaster, the UK fiscal ship is "far from seaworthy", said Ian Campbell on Breakingviews."For the sake of sound finance, the Government should be taxing more; neither the economy nor the voters are ready to take that." Growth "may struggle to stay positive", while corporation tax revenues look especially vulnerable. Public borrowing "seems certain to soar"; ultimately, whichever party wins the 2010 election will be forced to raise taxes to repair the mess.
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