GORDON BROWN OUTLINES STRATEGY FOR RECOVERY AND CALLS FOR

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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

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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
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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
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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

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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