Commenting on the implications for the UK of the global financial crisis, and the US response to recent dramatic events in the markets, David Kern, Economic Adviser to the British Chambers of Commerce, said:
“The worsening global financial crisis points to acute risks facing the global economy and the US is very probably in recession already. If the US downturn is severe, it is unrealistic to hope that Europe and Asia can escape the damaging consequences. In the face of the mounting crisis, the US has acted forcefully; it has cut interest rates aggressively and has introduced a fiscal package to try countering the threats to growth. The US Fed has not abandoned its responsibility to control inflation, but it has signalled clearly that the first priority is to reduce the threat of a major economic downturn.
“The UK has so far reacted to the crisis in a more relaxed and laid-back fashion than the US. However, this attitude could prove to be dangerously complacent. The very severe declines in the US housing market are not seen at present in the UK. This said, it is important to remember that the UK economy is facing problems and imbalances that are similar to, and possibly worse than, those facing the US. Our personal debt ratios are very high; the UK economy is vulnerable to a downturn in the financial sector; UK house prices are stretched; our current account deficit is very high and sterling could face sharp speculative attacks. Worst of all, given the exposed UK budgetary position, the fiscal rules may prevent the UK from using the fiscal weapon to counter a downturn.
“British business has so far been remarkably resilient in the face of the financial crisis. While a UK slowdown is unavoidable, a UK recession can be avoided but both H.M. Treasury and the Bank of England must accept that countering the threat to growth is the overriding priority. We may face in the near future a critical need for urgent corrective measures and, like in the US, the authorities must have in their armoury effective contingency plans. It is not necessary, or desirable, for the UK to imitate slavishly US policies but some of our weaknesses are similar to those of the US. We can learn useful lessons from the American response.”