Robert Shiller on the Possibility of Britan Experiencing a W-Shape Recession

Robert Shiller, Professor of Economics at Yale University, warned Saturday that Britain faces the prospect of two recessions in quick succession. Since March the stock market has rebounded by nearly 30%, raising hopes that the contraction may not be as severe as many economists had feared.

From Timesonline: The apparent upturn could soon go into reverse, [Shiller] told The Times, marking a repeat of economic patterns in the 1930s and the 1980s. Such a double-dip slowdown has been nicknamed by economists a “W-shaped” recession, where recovery is so fragile, the country could be plunged into another slowdown as soon as it emerged from the last.

Last week Alistair Darling, the Chancellor, brushed aside doubts that his Budget forecasts had been overoptimistic and predicted that the recession would be over by Christmas.

However, [Shiller] warned that “there is a real possibility of another recession. We may well see more bad news. It is a real failure of the imagination to think otherwise.”

[Shiller] said that there were a number of issues that threatened any long-term recovery for the British economy – rising unemployment, mortgage defaults, and another wave of new company failures that “could surprise us yet”.

Professor Shiller also said that the banks were still harboring large portfolios of troubled assets.

“… A lot of people think this recession is coming to an end. But I’m not so sure.

He added: “In 1931 in the US, President Hoover unveiled his recovery plan – there was a huge stock market rally — the market improved but it didn’t hold because bad news kept coming in. Increased confidence can be a self-fulfilling prophecy but it doesn’t always hold.”

Professor Shiller said, however, that he believed another likely scenario to be one where Britain would face a continuous decline with house prices falling for a number of years, drawing comparisons with the decade of misery in Japan in the 1990s.

House prices are still high in UK and beyond affordability levels. The value of commercial real estate continues to deteriorate. In addition — on the toxic asset front — we (the U.S.) estimate our bank losses to be over $2 trillion, UK bank losses are estimated to be $1 trillion, the only problem here is that the UK economy is only about 1/7th the size of the U.S., (U.S. GDP, measured on purchasing power parity basis, is estimated at $13.8 trillion, constituting 21% of the gross world product. UK’s output is at $2.7 trillion – accounting for little over 3% of the gross world product). So, one can see Shiller’s argument on the risk factors facing U.K.’s economy which in order to stabilize will need further fiscal stimulus and quantitative easing. The question is however, can the U.K. handle more debt.

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