GORDON BROWN OUTLINES STRATEGY FOR RECOVERY AND CALLS FOR

UNCLAS SECTION 01 OF 02 LONDON 000251 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV UK SUBJECT: GORDON BROWN OUTLINES STRATEGY FOR RECOVERY AND CALLS FOR INTERNATIONAL COOPERATION AS UK SLIPS INTO OFFICIAL RECESSION LONDON 00000251 001.2 OF 002 ¶1. (U) Three building blocks are essential for economic recovery in the UK, according to PM Gordon Brown. In a speech to the Foreign Press Association, January 26, Brown outlined the stages of the UK's "Stability and Recovery Plan" - bank recapitalization, monetary and fiscal stimulus, and credit stimulus. It was designed, he said, to bring security for savers, homeowners and businesses, and of jobs. Stage one, October's bank recapitalization, prevented the banking system from collapsing, he said, thereby preventing the loss of savings and jobs. Its success, he stressed, meant no ordinary UK savers lost their deposits and it provided banks with capital to absorb increased losses. Stage two, monetary and fiscal stimulus, combined significant monetary relaxation with increased investment in infrastructure, a VAT cut, and increased child benefits. This targeted action, according to Brown, will prevent the short-term impact of the recession from having long lasting effects on productivity and confidence. Stage three's credit stimulus package was designed to remove obstacles to lending, and aimed at re-creating an efficient, responsible and profitable banking system. ¶2. (U) Brown argued that the results of domestic action can be multiplied by coordinated international action. An early warning system is a priority, according to the PM, so that international financial flows are monitored and systemic global imbalances do not become sources of instability. As a first step, he said, the international community must use the Financial Stability Forum to create a framework for international governance. Second, the international regulatory deficit needs to be addressed, with the current ad hoc international regulation proving inadequate. He said the G20, at the April Summit, should discuss a Charter of Principles that would guide financial regulation and supervision. Finally, he stressed that international cooperation is needed to agree to standards of corporate governance, including an international standard of best practice for financial institutions. Brown added that a coordinated international response will ensure a quicker global and British recovery. UK Officially Enters Recession -------------- ¶3. (U) Brown's speech followed the announcement that the UK officially entered a recession, with negative 1.5 percent GDP growth in the fourth quarter of 2008, the steepest quarterly contraction since 1980. Weaker services and production industries output increased the rate of decline. Economists had predicted a 1.2 percent fall for the final quarter. Sterling fell almost 3 cents against the U.S. dollar to $1.3570 shortly after the announcement, but recovered slightly in the past two days. David Kern, chief economist at the British Chambers of Commerce, said the worse-than-expected decline in GDP highlighted the critical need to persevere with forceful corrective measures. He said, on the basis of these figures, the BCC forecasts a decline of GDP by 2.4 percent in 2009. The IMF expects the UK economy to shrink more than any other developed nation this year, contracting by 2.8 percent in 2009 with stunted recovery of 0.2 percent in 2010. ¶4. (U) Worse than expected GDP was only part of a wave of grim economic news. Unemployment in the three months to November, the latest available data, reached its highest level since September ¶1997. During the three-month period, unemployment increased by 131,000 to 1.923 million - an unemployment rate of 6.1 percent. The Bank of England released a survey of its business agents around the country who reported that the "broad picture remained one of shrinking demand for labor" and that "many contacts had sought to reduce head count." Retail sales volumes continued to decline, according to the Confederation of British Industry's (CBI's) distributive trades' survey. It showed that 63 percent of retailers said year-on-year sales volumes fell in the first half of January. According to the CBI's industrial trends survey, 50 percent of companies expect output to be lower in this quarter than the last, compared with seven percent expecting a rise, giving a balance of -43, the lowest since records began in 1975. Brown's Handling of Crisis Faces Growing Opposition -------------- -------------- ¶5. (SBU) Brown has faced considerable criticism for his handling of the crisis. A report from the Treasury Committee voices concern that "piecemeal measures" introduced by HMG may not be adequate in the face of the crisis in lending. The Committee questioned the wisdom of HMG's GBP 20 billion stimulus package, noting that it had so far had little effect. The MPs warned that October's bank recapitalization could be "hampering" the ability of banks to lend, given the onerous terms of the agreements. Further pressure came from the Institute for Fiscal Studies, which reported that the UK must drain an extra GBP 20 billion from the economy by 2015 to get public finances back on track. It calculated that public debt has LONDON 00000251 002.2 OF 002 risen by GBP 10,000 for every family in the country as a result of a collapse in tax revenues and the cost of HMG's stimulus package. During a particularly heated exchange between the PM and David Cameron during Prime Minister's Question Time, Cameron accused the PM of being "extraordinarily complacent" and denying the existence of a recession. He said the PM is in the "death throes of a failed premiership." Poor economic data has helped the Conservative Party increase its poll lead over Labour from five to 15 percent in one month, according to a poll for "The Independent." Labour's support is at its lowest since September's survey, slumping back to where it stood before Brown won international plaudits for his financial rescue package. TUTTLE