Friday, 11 July 2008
An offical Brown out: UK Economy over the Cliff
Posting this does not make me a happy man. Some whom I read (and like) seem to relish the idea of our economic woe and meltdown; not me.
The UK economy is on for a tough time. In context, in the Great Depression of the 1930's unemployment reached 25% and GDP shrank by 33%. I don't think we are going to go there.
However the definition of a recession is 2 consecutive quarters of falling GDP and it seems we could easily double that. There are some really poor imbalances and terrible decisions being made, with external events too the shocks just keep coming.
1 - House prices are not just falling but diving, in January the consensus was for house prices to fall maybe 5-10%. Well that is where we are now, half-way through the year and headed off a cliff - see this Telegraph chart:
2 - Oil and commodity booms, fuelled by real increases in demand, a flight of money from equities, biofuels and political troubles across producing nations are causing inflation - and there is nothing we can do.
3 - Money supply is actually contracting very quickly and real interest rates for consumers and corporates are rising - just at a time of deep indebtedness and need.
4- Interest rates are set to control inflation - however they control what will happen in two years time. We won't have inflation in 2 years, just and economic desert. Now is the time to start dropping rates, at least 0.5% in the UK, perhaps more. But this week the Bank ignored the calls.
5- The Public sector is so huge that nothing can be done to save money or create more jobs, instead the huge burden leaves us with high taxes that lower real take home incomes. Even the frivolous EU despairs of us. Neither main party has any solutions for this currently or is seriously considering slashing the state ( not should they now, more unemployed does not help at this time) but it needs to have its expansion halted.
6 - However raising taxes is suicidal, but that is what we are forced to do due to government spending. Pure financial insanity.
7- The stock market is at a 10 year low and falling, pensions investments are being hurt and there is no end in sight. People keep calling the bottom of the banking crisis, but Bradford and Bingley and Lehman Brothers are heading for a crash, as are Fannie Mae and Freddie Mac in the US mortgage market. This seems nowhere near an end.
8- UK policy is run by the incompetent Alistair Darling, Europe has no response to the ripping apart of the euro area - I stick to my prediction that Spain will fall out of the euro at some point soon. Only the US has some credible economic leadership, but is hamstrung by a lame duck President
9 - Global growth is stagflating as all the developing countries suffer from inflation, meanining our export markets are not going to be easy to grow either.
10- Personal indebtedness is so large that it will take years to pay-off and if that does happen alone this will cause a recession. It actually exceeds GDP. A huge chunk of jobs in the UK are tied to this for mortgages and loans in in Financial Services, Property and Retail for spending. All of which are screwed for the next few years.
(11 - Let's not even go there that Israel and Iran kick-off a major war too)
So overall, we have had it. The Tories need to think radically about the poilcies to get us out of this mess as we may still be in technical recession when they get into power in 2010. 2008 is bad, 2009 will be worse and the light may return in 2010, but maybe poor until the Olympics.
We are in it for the long-haul. Good luck to all the readers of this, I hope you are somewhat prepared and have jobs that are secure enough.
Posted by CityUnslicker