The British economy's 16-year period of uninterrupted growth officially ended
with the announcement on Friday that second-quarter gross domestic product
showed zero growth, rather than the previously estimated 0.2 per cent. Does
this really matter to anyone but statisticians or devotees of Guinness World
Records? The answer depends on whether this slowdown turns out to be a
hiccup or the start to a prolonged period of zero or negative growth. In the
former case, the temporary slowdown will soon be forgotten - or will be
remembered merely as the statistical by-product of a correction in house
prices that was inevitable and overdue.
However, if, as is widely assumed, the stalling of the economy in the second
quarter marks the beginning of a recession lasting into next year, then the
implications will spread well beyond the statistical yearbooks and estate
agents' windows. Unemployment and business bankruptcies will rise sharply,
government finances will sink deep into deficit, sterling will plunge and
housing and equity markets will suffer years of poor, depressed conditions,
as they did in the early 1980s and between 1990 and 1995.
Almost everyone in Britain, with the possible exceptions of Gordon Brown and
Alistair Darling, seems to agree with the latter prognosis.
Conventional wisdom asserts that after a decade of profligate self-delusion,
Britain has reverted to its traditional position as the sick man of Europe;
indeed, that Britain is one of the sickest economies in the world. Regular
readers of this column should be familiar with certain aspects of this view.
Although I initially underestimated the depth and duration of the global
credit crunch, I have argued throughout the past 12 months that Britain
would be more vulnerable than the United States or any other big economy to
whatever global financial problems did emerge.
While British politicians and commentators kept describing Northern Rock and
other banking problems here as by-products of the US sub-prime crisis, I was
perplexed by this view. After all, Britain's property markets were much more
overextended than America's, our levels of mortgage borrowing much higher
and our economic dependence on banking and finance much greater than in the
US. It seemed likely, therefore, that if the credit binge of the past decade
was really going to produce a serious hangover, the symptoms would be worse
in Britain than in the US.
In fact, when the building societies were still predicting a soft landing in
the housing market, before the freefall that began in April, I wrote here
that the long-dreaded correction in house prices had hardly even started and
that anyone who thought that the US housing market was suffering a “crisis”
or “disaster” should reach for the Book of Revelation to find appropriate
words for Britain's prospects in the year ahead. I mention this OTT imagery
only because Brixton Estates, one of Britain's most successful and shrewdly
countercyclical property companies, featured the Four Horsemen of the
Apocalypse on its annual report last week.
The message was similar to the one I was trying to convey: the state of the
British economy - and, certainly, of the property market - is, indeed, worse
than it has been for 15 years and, in my view, much worse than the situation
in America. But before we prepare for the rains of fire and blood, we should
recall two observations: first, that the past 15 years have been a period of
exceptional prosperity and, secondly, that US economic and housing
statistics, despite all the apocalyptic prophecies, are showing clear signs
of stabilisation and even improvement. So although it is overoptimistic to
expect any quick return to the boom conditions that preceded the credit
crunch, it is a gross exaggeration to compare the problems of today with the
worst economic and financial crises of the past decades. And, indeed, the
sentiment on the British economy has swung so far to the pessimistic extreme
that the big surprises - and the big financial opportunities - in the coming
year will probably be on the upside.
To see what I mean, compare the market sentiment about Britain with the
economic reality. The pound, after suffering another swoon in the wake of
Friday's GDP figures, is unequivocally regarded as the world's weakest
important currency. British house prices have been collapsing since the
spring by more than 2percent a month - an annualised rate of 25percent to
30percent, which is far steeper than the US suffered even at the worse point
of its housing crisis. This collapse in house prices is widely expected to
trigger enormous losses on mortgage lending, even though there is little
evidence of a close relationship between house prices and mortgage defaults,
which depend mainly on interest rates and changes in unemployment. As a
result of the market fears about their mortgage books, British banks,
including such too-big-to-fail giants as Royal Bank of Scotland, HBOS and
Barclays, which face no conceivable funding problems in any plausible
economic scenario, are trading at valuations implying that they are almost
insolvent.
What may seem more surprising against this background of universal gloom is
that Britain still has by far the highest interest rates of any G7 country -
and, therefore, the greatest scope for monetary easing. At the latest
meeting of the Monetary Policy Committee (MPC), there was a three-way split
in the vote - one member wanted a rate cut, another proposed a rate increase
and the seven others split the difference by voting for no change. Many
commentators have inferred from this that the Bank either does not know what
it is doing (a plausible conjecture after Northern Rock) or that it is
prepared to accept a total collapse of the economy to get inflation back to
target. But could there be some other explanation for the MPC's reluctance
to ease?
I think there is. Looking at the statistics, it is still far from certain
whether the economy really is as sick as suggested by the dismal state of
the housing market and bank stocks. The media and consumer and business
surveys may be in no doubt that the economy is in recession. And even after
the flat second-quarter GDP figures, there is so far little evidence of
recession risks in Britain, especially in comparison with the rest of
Europe. For example, last week's retail sales figures, which were much
stronger than expected, showed year-on-year growth of 2.1percent in Britain,
compared with a decline of 3.1percent in the eurozone. Admittedly, retail
sales are erratic and suspicious at present, but manufacturing production
conveys a similarly reassuring message - down by only 1.2 per cent on a
12-month basis, compared with the plunge of 6.8 per cent in both 1991 and
2002. And the same can be said of employment, purchasing-managers surveys,
GDP and many other statistics - all are quite weak but show no signs of the
economic catastrophe that equity and housing markets seem to imply.
Of course, it could be that consumers and manufacturers are simply in denial
and that Britain's real economy will collapse once the public starts to
understand the disaster anticipated by stock market investors. It could be,
however, that consumers and businesses have noticed what is happening in the
economy and have simply drawn different conclusions from those of the
markets. It is hard to imagine that anybody in Britain is unaware of the
housing slump and the credit crunch and, as I have noted previously,
financial markets are frequently plain wrong, especially near economic
turning points.
It is quite possible, then, that Britain's real economy will simply turn out
to be less sensitive to housing and credit problems than the financial
markets assume. It is equally possible, however, that the economy will
continue to deteriorate in the coming months, as is widely expected. If this
happens, and the next few months' statistics confirm that the economy is
continuing to weaken, there is every reason to expect a strong, rapid
response in terms of interest-rate reductions from the Bank of England. That
cannot, of course, be said of the European Central Bank - which is why,
despite all the present gloom, Britain is highly unlikely to become the sick
man of Europe.
So with personnel debt at £3.600,000,000,000, 000,000,0000 is something we should ignore. This is what Labour have prided themselves on. Uninterrupted growth is based on massive debt.
Brown is not an economist, he is an ex school teacher.
steve tea, manchester, cheshire
Retails statistics can be explained by a modern British illness: credit binge. Because of low interest rates, becse they believed banks, dealer of their addiction, when told they were rich... They're discovering that they only own debts. Britain will rediscover that it stillis the sick man in Europe
nicolas, paris, france
You just have to wait and see. Economics is a great discipline for explaining past events but useless for predicting. Take a deep, deep breath look out of the window and see that life goes on....
Russ, Stotfold, Beds
CBI forecast 2 million unemployed, I hope that the hard workers that came here with an invitation fm the Gov excercise their rights to use the welfare system, they came cuz big business needed them didn't it??
Well big business & the CBI were's the work??
Gang-masters are rubbing their hands.
Graham, St. Albans, uk
Interesting that the banks are now lending on the criteria they SHOULD have been using throughout the past ten years - ie a healthy 10-20% deposit, a careful scrutiny of ability to repay the mortgage, and having to rely on their own funds to lend the money. Credit card companies likewise!
Sue, Sheffield, UK
Thank you for injecting balance into this debate. We need to stop talking the economy down. Lets be honest but not inflate the issues. Then perhaps we can avoid the worst of it.
William, Surbiton, United Kingdom
Britain lacks an economic engine of any description.
Britain's bubble burst without help from a Global credit crisis
Richard, Bucharest,
Dont know how Anatole Kaletsky qualifies as a commentator on economics other than as a Labour supporter. 16 years of growth was all a mirage, all we had was 16 years of unprecedented borrowing and spending. Any fool should have been able to see this the house of cards, now its pay back time?
Chris, Woodbridge, England
A week on and a pound=1.23Euro.
UK not the Sick man?, how about dead man walking?
Pat, Coromandel, NZ
Optimism to the bitter end, Sir? For Mr. Kaletsky’s information the housing market here in North America is not improving. It is getting worse. The rate of collapse has decreased slightly but that does not mean that the housing collapse is not continuing inexorably. Article is dead wrong. Cheers
William Kent, Brandon, Canada
The root of the problem is that fiat currencies (dollars, pounds, euros etc) are finally being seen for what they are: worthless bits of paper that are really liabilities (to be paid by the tax payer) and not real assets that protect your wealth. All fiat currencies will collapse. God help us!
Bertram Brown, Bristol,
Why does everyone think growth is good? The ONLY reason the Government promotes growth is because it needs to pay back the ever increasing interest on its debt. This is a fundamental misconception. There needs to be a shift to quality not quantity. Counterfeit Government money is not the answer.Amen
jdpriddle, Bath,
It is time we joined the euro: we are in this mess because we are not in the eurozone.
With the euro we would have lower interest rates, lower inflation (yes lower ), less debt, a strong currency, increased productivity, AND MONETARY DISCIPLINE!
Time too for AK to change his anti-euro tune
Peter GODDARD, Epsom, England, EU
I can't wait to see the back of this government and get those astute Tories back in power. Of course under their administration inflation, interest rates and unemployment were all... oh dear- far, far worse than anything Labour has visited on us! I know Thatcher's recall is dulled but everyone else?
Keith, Newcastle, UK
Whilst there has historically been only a a weak relationship between mortage defaults and house prices, there is evidence emerging from the US that this is starting to change. The economically rationale thing for many people is simply to hand back the keys to the banks and walk away.
Jon, London,
Thanks for a well-written and cogent article. I'm surprised many of the posters don't get his point. The unwinding of a speculative bubble in property is painful but allows the economy to rebalance itself for future growth. It is also not the end of the world, unless you took out a 125% mortgage.
Adam , London,
If you build your house on sand it will fall down. The house is falling down. When the £ goes up in value British industry can't sell overseas. The £ went high in value. We have a large number of people with huge debts, and people who lose their jobs can't afford their expensive houses. Or food !
Phil de Buquet, Newport,
It is simply because we understand the credit crunch that everyone expects the worst. (Look at Fanny & Freddie in US! $6000 billion company failure needing govt bail out!)
We also don't believe the banks have declared all their losses. Yes it might turn out OK, but on the other hand ......
Alistair Nicholls, Manchester, UK
Britain will come through this if we work at it. The hard miles are where you show your true character. The poor and even profligate use of tax income is however increasing obvious in these harsher times, and this will need to be fixed in the next couple of years to ensure another 16 years of growth
Andrew Piercy, London , UK
The banks/b/society & industry are safeguarding their own skins/profits (& bonuses). Increasing rates & prices are all set to discourage the spender and will result in stagnation coupled with rising unemployment.
a fine mess Mr Brown (&Blair) has got us into !!!
Eurozone will suffer just bit later
BJ, Swale, uk
dear sir/madam
with 19 million Britons expected to holiday in Spain this year, how can people moan that the UK is the "sick man" of Europe. I have lived in the Uk, know Western Europe quite well, and think that Britain is the most advanced economy of Europe.
julen sanz ugarte
basquecountry
julen sanz ugarte, murgia, basque country
the only reason the euro is strong is because sterling is in decline. if we joined the eurozone the whole lot would be devalued.
Anton Wills-Eve, West Kirby, Wirral
Time to ditch the 2 consecutive quarters of negative growth.It's meaningless and used to depress people.Industrialised countries have soft landings,which is what 2 quarters really mean.It's not the end of the world.People get to pay debt down,and it's agood way for a country to take stock
david glowacki, london, uk
It is time we joined the euro: we are in this mess because we are not in the eurozone.
With the euro we would have lower interest rates, lower inflation (yes lower ), less debt, a strong currency, increased productivity, AND MONETARY DISCIPLINE!
Mr Kaletsky needs to change his anti-euro tune.
Peter GODDARD, Epsom, England, EU
Perhaps the explanation for retail sales is that we are choosing to spend what we have left before Gordon Brown cheats us out of that as well as our pensions. A windfall tax on energy is just a back door extra tax for the rest of us for example.
D Cage, Highworth, UK
Perhaps next time time gordon tells you something you might check it or at least question it instead of believing him like fools.Out here in the real world pubs/shops are closing daily.
Mitch, Wolverhampton, England
The cerdit crunch, rising fuel and food cost are not home grown, every country is affected, however, the Tories managed to create three resscession in 18 years, do people believe that the Tories can magic it all way? I think not !!!!
Nigel , Blackwood , Wales
What is the meaning of all these reports of doom & gloom & Statisticians? The ones who make it are the ones who defy conventional wisdom & go against the grain. My advice is: get some iron into your soul.
ian cheese, london, uk
The optimism returning to the States reflects specific intervention to stabilise the banks and put more money into consumers pockets.Contrast that with the "sit by and watch" mentality of the Govt, near silence from the "Oppostion", a split MPC and a bail out for Northern Rock-recession proof?
David Melville, London, UK
Nikola, since when could you 'default & buy the exact same thing cheaper' in the UK? When you walk away from a mortgaged house you're still on the hook for the shortfall (at least you were last time I looked into it). Maybe you're thinking of the US?
Colin Suttie, Calgary,
Anatole,
I think you are underestimating the dependency on financial services. FS are now highly geared, This means they may make a lot (16 years etc. etc.) and then lose it all and more. When they shut up shop, there's no spending and there's no govt tax revenue either. Boom, then Bust.
Anthony, Kew,
We are in a historical cyclical downturn and the gov. can twist and turn as much as they wish trying to impress voters they will get out of it....but they cant. We even could be heading into a DEPRESSION! We have just got to wait for the cycle to play itself out.
joe, Liverpool, UK
Strong retail sales figures simply mean that the British public continues in its delusion that throwing bags of money through shop doorways is necessary to their health and well-being. It's not economic sickness of course, but obsessional shopping is certainly psychiatric sickness.
eric campbell, harrogate, uk
AK compares the BoE positively to the ECB. Why? His view that simply lowering interest rates will avoid recession is naive. What about the balance of payments, reduced transactional volumes, high personal and corporate borrowing? The problems are more profound and deep. Stagflation seems likely.
Jenny, Ringwood, Hants, UK
Upside for me is that finally things make sense. I've watched for fifteen years as manufacturing has disappeared. As we've outsourced so many jobs. As we've seen a giant new Tesco open every week. I've wondered how we can all work in Tesco yet still appear to be a rich country. Answer: we can't.
Guy Thornton, Swindon,
It is sometimes forgotten that the Bank of England's remit is to keep growth as well as inflation at 2%.
Deflationary forces now predominate as seen in rapidly falling commodity prices, house prices and consumer spending.
The BoE can now target growth, which has fallen to 0%.
John Collins, Bromley, Kent
You are right to say that mortgage defaults are in large part dependent on unemployment. But that's set to rise sharply given the collapse of spending power in our debt-soaked & service-based economy. So mortgage defaults will also increase sharply.
I see very little upside for 2 years at least.
Jon Cooper, herts, uk,
Stirling is the weakest major currency with the highest rates.
New words will be needed to describe the plumet that will occur at the first whiff of rate cuts.
There is no scope for cuts unless 10%+ inflation is OK.
Pat, Coromandel, NZ
'though there is little evidence of a close relationship between house prices and mortgage defaults, which depend mainly on interest rates and changes in unemployment'.
Yeah, riiight. How many people will pay money for mortgage when they can default and buy the exact same thing cheaper? Would you?
Nikola, Plovdiv, BG
This is what you get when you have a retail based economy with more people working in Indian restaurants than in manufacturing industry.
Mark, Peterborough, uk
Kaletsky got totally wrong the global credit crisis, he was predicting growth, where everybody else was predicting a slowdown and now he overestimates the fundamental and prospects of the British economy. Kaletsky used to be sharp and insightful analyst but that is no longer!
Eleanor, London, UK
Britain will become the “poor man of Europe”. Last year sterling devalued 20% against the Euro. We are now seeing a second devaluation – against the dollar. This will ensure inflationary pressures remain and interest rates will have to remain high.
Steve, Eastleigh,
Good article. I agree that we are at an economic 'tipping point' and we need to discourage those with a vested interest in the continued economic misery (e.g. Daily Mail readers everywhere) from talking the country into a full-on recession. Just look at all the bargain stocks on the market!!
chris, stirling, UK
This government has spent 11 years saying that those who work hardest & reap reward for their labour are underserving and those who contribute little or nothing deserve far more. Result: a growing pool of malcontents who want everything handed to them, giving nothing in return.
S.C. Huldig, Leiden, NL
Whilst I agree that everybody will probably know about the housing market and the credit crunch I do not think many understand the knock on effect. The slowing of available credit slows the housing market which inturn puts downward pressure on prices which in turn gets media attention and onward etc
john l, doncaster, south yorks
More muddle headed thinking resulting from Kaletsky trying to nuance his previous pollyanna-ish stance. He's not quite given up on this with regard to the US but this will come.
David Holden, Chester,
VIVA LA boom years of Blair+ Brown encouranging the biggest debt promotion in history, 125% mortgages, plastic money, easy personnal loans ,no savings etc.
Nicholas, LARNACA, CYPRUS
some of us would question if it as been a GENUINE 16 YEARS OF GROWTH if it as collapsed so quickly. Was The perceived growth really only borrowed money i.e. CREDIT being spent on the high street which kept jobs going. A lot of personal wealth was based ONLY on the artificial rise in property values!
michael j kay, northwich, england
Spot on article.Good to see that at least one journalist is not the standard "Doom & Gloom" merchant the media normally has writing articles sapping the UKs publics confidence.
Bill Rees, Truro, Uk
Really? Personal debt mountain's rapidly ascending towards £1.5 trillion, a figure which has almost tripled since the formation of the MPC. Public debts at £600 billion (probably much higher with all those off-the-balance-sheet PFIs) and also rising rapidly... utterly unsustainable
cww, Ipswich,
But 60% of our exports go to europe so if they cut spending, we will suffer. And since we don't make much - most of our money is made in financial services, when they slow, our output slows too. So we are stuffed either way. We tried to make money doing little and now it is time to pay.
Richard, Plymouth,
Fiddling with interest rates makes no difference at all to economic and market cycles. A cyclical downturn or recession is surely due and the 'credit binge' (good expression) will now have to be paid for through a fall in asset prices and financial institutions, the stock market and house prices.
Graham Gould, Illinois, USA
Life goes on. We got through the Great Depression and we will get through this. Things will get worse before they get better as 2 million come off cheap fixes and have to deal with 30/40% increase in their mortgage payments as well as other costs going up. Be through the worst by end of 2011 though
Rupert, London, Uk
It depends whether you are talking about reality or psychology. Far too many people are emotionally invested in failure, and for them Britain would remain the 'sick man" even if it was the richest country on the planet. The culture of failure is just too familiar and reassuring to let go of.
jon livesey, Sunnyvale, CA/USA