RBS: Five years after the crunch
“It usually takes a long time to recover from financial crises and unfortunately, this episode has been no exception.
“Two to three years after a cyclical low in other post-war recoveries, UK economic growth has usually been above its long-run average.
“But it’s now five years since the queues outside Northern Rock and the UK economy remains 4% smaller than it was pre-recession and 14% smaller than it would have been had this been a typical recovery.
“To put it in context, this is a slower recovery than the one following the Great Depression, and it’s going to continue to be sluggish.
“Thoughts about the solutions to the recession are now moving away from just austerity and deficit reduction and more towards some fiscal stimulus.
“Indeed the Chancellor is keen to boost construction and house building in particular because of the rapid transmission this has to employment. It’s not clear whether the proposed changes to planning policy will do much straight away, but anything that helps to stimulate activity will be welcome.
“But we shouldn’t forget that monetary policy is also a tool. While the Monetary Policy Committee’s role is to control inflation, it has to take account of economic growth, too simply because that affects the pace of price changes.
“So we shouldn’t underestimate the effect of the extraordinary amount of monetary loosening there has been in the past five years, nor how this saved the housing and mortgage market from much worse conditions.
“The latest decision to keep interest rates ay 0.5% and leave the size of the asset purchase scheme unchanged was “relatively straightforward” for most members.
“Some even thought that there will need to be more loosening in due course, despite the possibility of short term inflation pressure coming from commodity prices. Higher inflation is bad news for households as it squeezes their disposable income. But the strength of the labour market despite underlying weakness in output, and thus falling productivity rates is still cushioning the blow.
“Looking ahead, the prospects for the UK economy are still subdued. A slowing global economy, continued uncertainty in the Eurozone and the extent of budgetary tightening in the US are all culprits.
“But there is good news. The MPC is not alone in being encouraged by the effect of the Funding for Lending Scheme on lending rates. We need more time to assess the full effect the scheme might have, but so far, so good.”