Chancellor of the Exchequer George Osborne said the problems in the British economy are deeply entrenched and difficult to resolve as the risk of an unprecedented triple-dip recession looms.
Britain’s economy shrank 0.3 percent in the fourth quarter, more than economists forecast, as service-sector output stagnated and government spending and manufacturing contracted. Osborne said it will take “hard work and perseverance” to bring a lasting recovery.
“These problems were many years in the making and there’s no magic solution,” Osborne told broadcasters today at the World Economic Forum in Davos, Switzerland. “The British people understand there’s no overnight solution.”
Osborne is facing calls from the International Monetary Fund to ease the pace of his fiscal consolidation plans and warnings from ratings companies that U.K. government bonds may lose their top-grade status as the economy struggles to lift itself out of the financial crisis that began five years ago.
Household debt is equivalent to about 1 1/2 times disposable income, and two in every five mortgage borrowers pay only the interest on their home loans. Consumers can no longer rely on easy bank credit and will remain squeezed for years.
“We’re making progress,” Osborne said. “It’s a very difficult situation and I think people understand there’s no magic wand.”
The U.K. has recovered only half of the economic output lost during the 2008-2009 recession as inflation outpaces incomes, government spending cuts bite and the euro-region debt crisis saps demand in the biggest market for British goods. Concern about the outlook has pushed the pound to its lowest level against the dollar for five months and a 13-month low against the euro.
While the U.S., German and Canadian economies are back above their pre-recession levels, U.K. gross domestic product was 3.3 percent below in the fourth quarter -- only Italy is further behind among Group of Seven nations. It means Britain remains mired in its longest peacetime slump of any since 1920, according to the National Institute of Economic and Social Research.
The IMF cut its U.K. growth forecasts this week and Chief Economist Olivier Blanchard said in comments broadcast yesterday that a “slower fiscal consolidation may be appropriate.”
The opposition Labour Party restated its call for looser fiscal policy to cushion households from the crisis and called on Osborne to introduce a jobs guarantee for the long-term unemployed, a temporary cut in sales taxes and more spending on infrastructure.
“This government’s failing plan has now seen our economy stagnate for over two years and borrowing is now rising as a result,” said Ed Balls, who speaks for Labour against Osborne in Parliament.