Outlook: We are in serious danger of recession

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The Independent Online
HOW SERIOUS is it out there? With Safeway saying that this Christmas will be the most challenging for supermarkets in years, new figures showing a month-on-month decline in retail sales during October, and the Bank of England's monetary policy committee admitting that more cuts in interest rates will be needed, things are obviously a good deal worse than Gordon Brown and the Treasury would like to admit.

It is still not possible to say with certainty that there will be a recession next year. The Bank of England and the Treasury continue to insist that there won't be, as indeed do most independent economic forecasters. Even so, those very same forecasts grow steadily more gloomy every time you look, suggesting that the position is deteriorating at an alarming pace.

The last time this occurred was in the early 1990s, when the economy suddenly nose-dived into recession. Few forecasters predicted the speed and severity of the downturn on that occasion either. Perhaps the most frightening thing about a downturn in full swing is that there is very little monetary policy, with its long lead times, can do to halt the slide once under way.

The anecdotal evidence of a recession in the making, despite the interest rate cuts of the last few months, is already alarming. For instance, there is virtually no new commercial property development being commissioned, many retailers are slashing their orders for the spring and beyond, and business organisations across the land are tightening their belts and cutting costs in preparation for hard times.

The forecasters say there won't be a recession. Plummeting business confidence suggests strongly there will be one. In this context, the minutes of the last MPC meeting, published yesterday, make particularly intriguing reading. The debate centres not so much on the need for a cut in rates to head off the risk of recession and prevent an undershooting of the inflation target - for the MPC is agreed that any attempt to fine-tune the economy next year through interest rates is a mug's game - as the psychological effect of the size of any cut.

The majority took the view that a big cut, or even one that was more than expected, might panic business and markets into thinking the economic outlook much worse than was being admitted to, further exaggerating the risk of recession. Willem Buiter, on the other hand, thought a larger cut might fortify consumer and business confidence.

If you think this is evidence of quite muddled and uncertain thinking, you would probably be right, for it is plainly a contradiction to agree you cannot effect the economy in the short term through interest rate changes but disagree on the effect those changes might have on business confidence. The important point to surmise from all this, however, is that rates are going to be cut again quite soon, and in doing so the MPC will be responding to the immediate threat of recession. That would strongly suggest that things are indeed quite serious.