Recession Likely in UK and US

There is an article here about the prospects of recession in the US

Basically, a combination of falling house prices and financial instability is likely to cause significant falls in US consumer spending and a recession seems hard to avoid. However, I am impressed by the way the US monetary authorities are trying to deal with the difficult circumstances. They seem to have no hesitation in cutting interest rates to boost spending. The organised rescue of Bear Sterns may leave investors unhappy, but compared to the debacle of Northern Rock, it has many merits; maintaining confidence in the banking sector is vital to avoid any financial meltdown. With these attempts to inject liquidity into the banking sector, I would expect the US to limit the extent of the forthcoming recession. The main danger is if house price deflation continues to decelerate and consumers become insensitive to interest rate cuts. There is also a fear that there may be more ‘Bear Sterns’ in the background.

Recession in UK?

The UK is further away from a recession. House prices, key to the economy, are currently stagnating rather than falling. However, like the US, the UK has a very low savings rate and high rates of borrowing. This makes the UK vulnerable to the credit crisis which is pushing up interest rates for borrowers.

Unfortunately, the UK needs to rebalance the economy. It needs to reduce its borrowing and excessive spending (illustrated by current account deficit). This rebalancing is likely to involve lower consumer spending. The uncertain question is whether the downturn will be moderate and managed or escalate into a full blown recession. At the moment, the MPC certainly seem less keen to cut rates to increase demand for money.

Problems of personal debt in the UK