In its latest quarterly inflation report The Bank of England reported that: "the world economy remained in deep recession: output contracted further and international trade fell precipitously. The global banking and financial system remained fragile despite further significant intervention by the authorities...But there were promising signs, both in the United Kingdom and globally, that the pace of decline had begun to moderate."
Economic recovery, it seems, is likely to be slow and protracted with weak global demand, but economic stimuli from the easing in monetary policy, fiscal policy adjustments and international proactivity in improving the availability of credit should lead to a recovery in economic growth, but the "timing and strength of that recovery is highly uncertain" with the substantive contraction in global trade, households saving more and the availability of credit to companies and individuals only improving gradually.
Mervyn King, the governor of The Bank of England reported that a sustained recovery will take considerably longer than in the past past recessions. Household and corporate spending has yet to show signs of rebounding and it is highly likely that credit will remain constrained as the banks will not take risks with bankruptcies and unemployment still on the rise. Further, they are continuing to deleverage in order to raise capital ratios.
Mr King also said that the flaws in the financial system was like a run-away ponzi scheme of one layer of credit derivative piled on top of another. However, much of the bad debt is not due solely to credit derivatives but is fueled by individuals and businesses who were encouraged to overextend themselves with debt. It is still unknown to what extent the banks still hold on to huge volumes of toxic assets.
The days of boom are now to be regulated in an attempt to make the banking system safe, and the regulators will insist on far larger capital buffers.
The report also argues that there could be growth next year as companies have started to restock and, together with measures of monetary easing and fiscal stimulus, the worst seems to be over. However, the banks still have billions of dollars of loans that are likely to go bad and will therefore still appear to be undercapitalised.
Even if growth is finally on its way up, the effects of this crisis on employment will no doubt continue to make itself heard way into next year at the earliest. Economies the world over will also experience painful restructuring, with Britain especially vulnerable as the losses in financial services are causing tax receipts to dry up.
Laying the foundations for sustainable global economic recovery will require no less than dedicated reform in the monetary system. It is not time yet to talk about "the green shoots of recovery" but rather how deep resulting unemployment figures will affect the world and how the financial system as a whole is addressed.
