VZCZCXRO7205
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHLO #0251/01 0281638
ZNR UUUUU ZZH
P 281638Z JAN 09
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 1211
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHBL/AMCONSUL BELFAST PRIORITY 1214
RUEHED/AMCONSUL EDINBURGH PRIORITY 1062

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