March 28, 2008

Recession risk warning for business

by Brian Turner

Investment bank Lehman Brothers has warned that they see a 1 in 3 chance of the UK going into recession over the next 2 years.

A report by Lehman Brothers, one of the world’s largest investment banks, has concluded that the UK faces a significant chance of entering recession within the next two years.

According to the report, the Bank of England would be forced to cut interest rates to around 4% to keep the economy moving, and that house prices would fall by 8%.

However, Global Insight disagrees, stating that the UK is simply headed for a low period of below-trend growth.

While a recession is rarely welcomed by consumers, it is important to point out that economies move in clear economic cycles, and that just as economic boost is a part of this cycle, so is the inevitable retraction.

In that regard, a recession should not be unwelcome – a recession is nothing more than a natural correction for over-indulgence in the boom years.

In short, it’s like the mini-diet that follows the Christmas binge eating. And that’s healthy – and required for continued good health.

The problem is that in America, the US Treasury is doing everything they can to avoid recession – which in the analogy above, is tantamount to trying to ensure plenty more over-eating even after the Christmas binge. The result is continued devaluation of the dollar and rising with inflation with potentially far more serious economic problems being created for the long term..

A recession is nothing scary – it’s nothing more than 2 quarters of negative growth.

The really scary thought is when policy makers think they can rewrite economic theory, and end up storing up far more serious economic problems in the long term.

We can therefore only hope the Bank of England takes a long-term view of the UK economy, and avoids taking a lead from the political and business interests of the US.

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