Global recession and domestic lending
There's shocking evidence this morning of the magnitude of the global economic slowdown from Rio Tinto's swingeing expenditure cuts. But there are also signs of evasive action by the Treasury to prevent the continuing squeeze on bank lending from magnifying what looks like a very sharp recession in the UK.
Remarks yesterday by the Chancellor (see this morning's FT lead) suggest that the Treasury is making progress on initiatives to facilitate increased bank lending to the real economy.
For detail on what the Treasury is considering, see my note of Friday (How much will taxpayers finance the real economy?).
Putting the mechanics to one side, the government is edging towards a scheme that would have the following important characteristics:
- taxpayers would underwrite bank lending to the real economy, or the provision of loans to business and to the housing market;
- the cost of that taxpayer support for banks would be cheaper than the main existing scheme, the £250bn credit guarantee scheme, and access to the support would be easier and quicker for banks;
- the help from taxpayers would be in place for perhaps as long as five years, or longer than the three years of the credit guarantee scheme and of the £200bn special liquidity scheme (which allows banks to swap mortgages for easy-to-sell Treasury bills);
- the overall design of the new arrangements would mean that the state would in effect be borrowing to provide funds to banks, thus in part filling a massive hole for them caused by the virtual closure of wholesale markets.
To put it another way, taxpayers would become lenders to the real economy to the tune of several hundred billion pounds, on top of the £600bn of support we as taxpayers have already provided to the banking system in the form of loans, guarantees and the injection of capital.
That may sound scary. And it would certainly be foolish to assume that money managers, who are supposed to buy all the debt issued or guaranteed by HMT, won't at some point get a seriously bad case of the heebie-jeebies about the rising burden of our public-sector liabilities.
But even the Tories say that extending and easing taxpayer guarantees for bank lending would be a good thing, presumably because, like many, they view the alternative - bank lending continuing to shrink and thus exacerbating the deep problems already being experienced by businesses and households - as much scarier.
There's no ignoring the powerful recessionary forces that threaten us. For example, the National Institute of Economic and Social Research - which is never knowingly sensationalist - said today that it believes that the economy shrank by a worse-than-expected 1% in the three months to the end of November.
Also, a shocking announcement of massive redundancies and spending cuts at Rio Tinto is a microcosm (albeit a very big microcosm) of savage recessionary trends highlighted yesterday by the World Bank.
Hailing the end of a "historic commodity price boom", the World Bank forecasts that world trade will shrink by 2.1% in 2009, the first contraction of world trade since 1982.
Part of that is a manifestation of the amazingly shrunken appetite for raw materials of the world's great manufacturer, China. And Rio doesn't expect a recovery in Chinese demand until the second half of next year.
The World Bank says that "the possibility of a serious global recession cannot be ruled out". And you only have to look at what Rio Tinto is doing to see why a cut in the world's economic output is far from impossible.
The giant mining conglomerate is reducing its "controllable operating costs" by a colossal $2.5bn a year. Its capital spending is being reduced by $5bn next year to $4bn - and it gives no guarantees there'll be a revival in 2010.
Those attempts by Rio to generate cash and thus reduce its massive borrowings of $39bn will cause disappointment and indeed hardship in many communities all over the world.
In developing countries, for example, belt-tightening by companies like Rio will have a profound effect. According to the World Bank, net flows of lending and investment to developing countries are projected to shrink from $1000bn in 2007 to $530bn next year - a reduction of almost half.
The official forecasts of the World Bank are that in 2009 the world's "high income" economies will shrink by 0.1% and the global economy will expand by an insipid 0.9%.
To put that into context, in recent years global growth has been nearer 4%. So although the global economic mess was largely generated by the financial excesses of the richest countries, notably the US and (in a supporting role) the UK, no country will be wholly insulated or protected.