Earlier this year, Gordon Brown insisted that Britain was “better placed than most” to withstand global turbulence. Now, however, the economy has begun to shrink, with output in the third quarter falling by 0.5%, the largest quarterly slide since 1990. Brown’s latest line is that “recession is a foreign ailment”, which Britain only contracted through its exposure to global markets, notes The Observer. But “while the credit crunch may have started abroad, it was custom-made to hurt Britain”.
The Government has presided over a period in which the financial sector mushroomed, growing twice as fast as the overall economy between 2003 and 2007, while amid the financial boom cheap credit and loose lending vastly over-inflated the housing market and ensured that British households’ debts as a proportion of disposable income topped even US levels. Now “an economy built on foundations of financial froth is facing grim readjustment”, says Ian Campbell on Breakingviews. No wonder the pound is plummeting on the forex markets.
Housing and consumption slide
Bad news is piling up in the housing market. The FSA said repossessions jumped by 71% year-on-year in the second quarter and borrowers at least three months behind on their payments were up 16%. With unemployment rising and credit conditions still tightening (the Bank of England has highlighted the likelihood of bank lending falling despite the Government’s capital injection as banks restore their balance sheets) repossessions could hit a 15-year high this year, said Capital Economics. The credit squeeze and poor housing and economic outlook are set to keep mortgage approvals at “rock-bottom”, putting more pressure on prices, on track for a 20% slide next year.
The slump in the value of their key asset will make consumers even less willing to spend. The latest CBI survey of the high street this week revealed a seventh successive monthly fall in sales in October. Even Tesco, which for years has budgeted for UK sales growth of 3%-4%, now only foresees 2% growth; “they expect the UK economy to be materially slower”, says Shore Capital’s Clive Black.
UK recession: what next?
Thanks to the spending spree of the last few years there is no money in the Government’s kitty to finance counter-cyclical spending to alleviate the downturn. Interest-rate cuts are unlikely to work miracles, as the money markets remain gummed up, weakening the “transmission” of monetary easing to the economy, as Martin Wolf noted in the FT. As Larry Elliott said in The Guardian, “after all the years of living on tick”, Britain is set for a “painful reality check”.