By Kevin Sullivan
Washington Post Foreign Service
Tuesday, November 18, 2008
LONDON, Nov. 17 -- Britain's leading business organization issued a grim warning on the U.K. economy Monday as the country's political leaders bickered about how frankly they should discuss their economic worries in public.
"The short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer-lasting," said John Cridland of the Confederation of British Industry (CBI), which predicted that unemployment could jump to 9 percent with 3 million people out of work by 2010.
Faced with spreading fallout from the global credit crunch, the CBI sharply downgraded its economic predictions. Two months ago, it said the British economy would grow 0.3 percent next year; now it envisions an economic contraction of 1.7 percent.
"Since our last forecast was published in September, the banking system has come under immense strain, sending consumer and business confidence plummeting in its wake," Cridland said in a statement.
The CBI's report followed a similarly bleak assessment by the British Chambers of Commerce, which warned that the British pound could "plummet to dangerous lows" if Prime Minister Gordon Brown's anticipated fiscal stimulus package is not successful.
The economic news spilled into the political arena in recent days when George Osborne, the opposition Conservative Party's top spokesman on economic matters, publicly warned of a possible collapse of the pound.
In an interview Friday in London's Times newspaper, Osborne said Brown's proposed borrowing-and-spending program, perhaps coupled with tax cuts to stimulate the economy, could drive down the value of the pound. The British currency has already lost a quarter of its value against the dollar in the past three months.
"We are in danger, if the government is not careful, of having a proper sterling collapse, a run on the pound," Osborne said, adding that Brown's borrowing might have short-term benefits but could be a "huge burden on the economy" in the long run.
Brown and his Labor Party lieutenants fired back at Osborne, saying his comments were reckless and broke an unwritten understanding that senior politicians should not make public statements that could damage the value of the British currency.
Brown said he expected senior politicians to be "responsible" at a time when people are worried about the economy.
"My job is to tell the British people the truth about the British economy -- the truth that it is the worst-prepared economy in the world for the recession, the truth we've got the highest levels of personal debt in the world, the truth that the pound has fallen by a record amount against other currencies," Osborne responded in a televised interview Sunday.
Many analysts defended Osborne's right to speak his mind in public, but several said he should have chosen his words more carefully.
"There are responsible ways of saying these things and irresponsible ways," Hugo Dixon, editor in chief of Breakingviews.com, which monitors the financial industry, said in an interview. "He used extreme language."
Dixon, in a column published Sunday, said that Osborne was "unwise" to make public comments that could "provoke panic" but that he had "certainly put his finger on a serious issue."
"Put simply, the U.K. has an air of Iceland about it," Dixon wrote with his co-author, Edward Hadas.
"The tiny island state was brought down when foreigners lost trust in the government's ability to bail out a banking system with massive foreign currency debts at a time when the country was also running a huge trade deficit," they wrote. "After foreigners refused to finance its banks, they went bust and the country's currency sank like a lead balloon."
Dixon said U.K. banks had foreign currency liabilities that were three times Britain's gross domestic product. While Iceland's bank debt was more than seven times the GDP, the British margin is still "too large for comfort," he said.
"We're not trying to say that the U.K. is Iceland," Dixon said in the interview. "Iceland is the extreme. But there are serious vulnerabilities in the U.K. And the comparisons make for uncomfortable reading."
Mark Duckenfield, lecturer in the politics of the world economy at the London School of Economics, said comparing the two nations was like comparing "two separate universes."
"Iceland has fish, finance and tourism," he said. Britain has "a very diverse and sophisticated economy."
On the streets of London, the building recession is already leading to angst.
"People are very worried, we all are. You can see people thinking more about what they spend," said Tina Bury, 52, who runs a fruit stall in the Exmouth Market. "Customers tell me they aren't going to buy a lot of Christmas gifts, they are reining it in. A lot of people are very worried for their jobs."
Barry Allen, 50, a taxi driver working near the market, said he was trying not to let it all get him down.
"I like to look at life as half-full," he said. "I still have a job -- I'm not a gloom-and-doom merchant. The world doesn't owe us a living."
Special correspondent Karla Adam contributed to this report.
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