Is the UK economy really that screwed

Fraser Nelson reports that:

"CitiGroup is now forecasting a 3.3% contraction of the economy this year – last month it was forecasting a 2.5% drop. It says in the note “Apologies for the frequent updates, but the economy is in freefall”. So is Britain well placed to handle the downturn?, I hand over to Michael Saunders from Citi when discussing the 3.3% GDP drop he now expects for this year:

“To put that in context, no G7 country has recorded a GDP decline of more than 3% in any year during the last 50 years. And it may be even worse. If GDP continues to fall by 1.5% QoQ during 2009, then GDP will fall by about 5% in 2009 as a whole. To put that in context, this would be similar to the worst year of the 1930s slump (1931),which saw UK GDP plunge 5.5%.... From here, a recession that lasts for only a year or two would qualify as a relatively good outcome.”

I believe a 10% drop in GDP constitutes a depression, looks like we are heading for a depression.

Although if you want to think positive, Chris Giles and Andrew Bounds in the FT think differently:

"So rather than a sudden bust, recourse to the IMF and a collapse in sterling, the most plausible outlook in these highly uncertain times is that a deep and nasty recession eventually ends and a new economy emerges for the next decade.

But that will feel like no new dawn. The overhang of debt is likely, in contrast to the past decade, to result in lower growth, persistently higher unemployment, lower house prices, extremely tight public expenditure, higher taxes, higher borrowing costs and a slower rise in prosperity. It is not much to look forward to."

We have come a long way when the above sentence can be described as a positive view...

Do read the whole of Chris Giles and Andrew Bounds' piece, I found it strangely reassuring. I would like to believe their premise that the UK is not on the edge of a precipice with nothing but poverty and despair to come, I really would. Should I believe them with their positive reports of Moody’s Investors Service view that:

"Britain was not about to be downgraded, saying “the UK has enough vitality as an economy to rebound” and “the government has enough room to cut spending when the crisis abates and, even more, to raise taxes to keep debt dynamics under control over time”."

and that:

"Investors agree. Yields on government bonds remain at historic lows – even if the spread between gilts and German bunds has risen a touch in recent weeks. There have yet been no problems in financing the government in recent bond auctions – unlike Germany – and the fall in sterling makes the values more attractive to many foreign investors.

Most UK economists have also been irritated by Mr Rogers’ suggestion that rats should be leaving Britain’s sinking ship. Ross Walker, an economist at Royal Bank of Scotland, was so riled he joined a colleague in writing an open letter to Mr Rogers accusing him of lacking rigour. “As with most developed economies, manufacturing is shrinking as a share of [gross domestic product] but – even in the UK – is still larger than the financial intermediation sector,” he wrote. Britain remains the world’s sixth largest manufacturing power."

or should I believe the alternative and more popular (!) opinion that we are economically screwed.