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Economic review shows optimism for a 2010 recovery

At the Bank of England’s recent economic review, which was held by Peter Andrews and Roger Beales, the outlook was upbeat for recovery.

Reflecting on the inflation report, we were told that a 2010 recovery could be on the cards for a few reasons.

While loss of output – gross domestic product – could go as low as -6% this year, by 2010 it could reach as high as 3%.

First, the UK will have ample resources and fewer restraints by then, as materials have been stockpiling since the onset of the downturn and there is a high availability of employees should markets wish to expand.

Also the massive stimuli to the money markets such as the base rate reductions, which have thus far been 4% since last October, has resulted in lower costs, along with fiscal easing, notably the VAT cuts.

While the exchange rate has fallen, sterling’s depreciation of more than 25% since July 2007 makes our exports more competitive.

It also puts upward pressure on inflation to help balance the dramatic drop in inflation in the last two months.

While the Consumer Price Index was 3% last month, the Retail Price Index fell to 0.1%, mainly as a result of reductions in mortgage interest payments.

The Monetary Policy Committee has also now been authorised to purchase Bank assets such as gilts and corporate debt as part of monetary policy, which is expected to support credit growth significantly, particularly when paralleled by the activity of the US and abroad.

History shows that it typically takes up to 12 months for the effects of monetary and fiscal policy to show. The fall in oil and commodity prices since last summer means an improvement to our real income.

The Bank’s models are vast and detailed, but there are always issues with predictive models.

One risk is the lack of information we have on the global economy, specifically how long it will take to stabilise.

A prolonged period of subdued credit will also affect our ability to spend, both as consumers and as businesses.

There is a risk that households could retract demand more than has been projected due to lack of confidence, particularly where the threat of unemployment results in increased saving, instead of spending.

Repossessions can also lag behind the worst of any crisis, unsurprisingly, by three to nine months.

Companies’ insurance claims on trade credit rose 60% just in Q3 2008, but these insurances will become more difficult to source as demand for them rises.

The unpredictable time taken to administer asking for letters of credit as a substitute also skews the recovery projection models.

Where firms have been forced to take higher risks to accommodate losses, cars and retail have suffered.

Cuts to employment also puts pressure on the supply side. There is the chance that a lag will leave us unable to meet the market demand for exports and domestic supply.

Of course, no-one has a crystal ball, but it’s at least good to know that the resources are ripe for a turnaround should the climate accommodate.

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