David Shepherd, professor of economics and MBA programme director at Westminster Business School
Although the economic downturn is affecting the entire world economy, the UK and the US are two of the countries likely to suffer most. The US and the UK enjoyed the strongest growth among the industrial economies over the past 10 years, largely on the back of an extraordinary expansion in the financial services sector and a consumer boom fuelled by cheap credit and soaring asset prices. But now that these forces have gone into reverse, it is hardly
surprising that the countries that prospered from the boom will also suffer during the contraction.
With the benefit of hindsight, it is now clear that much of the increased wealth apparently generated in the UK over the past decade was illusory and that sustainable growth will ultimately require increased consumer saving, reduced public expenditure and significantly lower asset prices, which properly reflect the nation's income-generating capacity.
The problem for policy-makers is that the monetary and fiscal measures designed to boost spending in the short run, to mitigate the immediate impact
of the recession, are likely to work
only if they delay the economic and financial adjustments required for sustainable growth.
Paradoxically, this means that if current policies are successful in reducing the severity of the recession, they are likely also to delay the eventual recovery of the economy.
Tony Dolphin, senior economist, Institute for Public Policy Research
While the causes of this recession are different from those of other post-war downturns, broad economic developments during 2009 are likely to follow the same pattern as in other recessions. In all countries, households will cut back their spending on discretionary items. This will include outlay on some services, such as eating out, but the biggest cutbacks will affect "big-ticket" manufactured items such as cars. Car sales have fallen by more than 20 per cent in the UK over the past year, and by twice that in the US. Meanwhile, worries about future demand and credit constraints will cause businesses to cut their investment spending.
As a result, while output in the service sector will contract a little, production in the manufacturing sector will drop dramatically. World trade will shrink. And the worst-hit countries will be those that have relied in recent years on trade and manufacturing output for growth. Among the major developed countries that will mean Japan and Germany. Both will also be hampered by the relative strength of their currencies, while the UK should benefit from the 20 per cent fall in sterling over the past year. I would expect both to fare worse than the UK in the recession.
