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.


Mark Wadsworth said...

Sell to rent. Cash is King.

The only glimmer of good news out of all that is 3. 'rising real interest rates' - I am a saver not a borrower.

Newmania said...

That is a magesterial post in my attractively intuitive way I was just starting to feel a cold wind on the back of my neck and this is one I will be carefully filing
I will go so far as to say this is the best thing you have ever done at a time when the economy is THE issue

Thank god we traded House for cash last year. If I knew how we got it right I would do it again

Old BE said...

1. Inflation is not as high as it was in 1990 - even by RPI standards

2. House prices in London don't seem to have dived yet

3. There is still plenty of credit for sensible people (I get offers all the time)

4. It's going to be tough for people who went beyond sensible during the easy times

Old BE said...

5. I am still more concerned about inflation than I am about unemployment - even having gone through the downsizing phase earlier this year.

6. Perhaps I am naive because it the is my first time in a recession.

Newmania said...

BE we are in the phoney war , have a look at the American mortgage market. Lnders with Trillians ..yes trillions are in trouble .

We have as much chace of avoiding it as a snail has of out-running a forest fire

Newmania said...

House prices in London don't seem to have dived yet

Try selling !!!

Newmania said...

Sell to rent. Cash is King.

eeerm inflation....Look for the deals

Old BE said...

Welllllllll why aren't the experts in Threadneedle Street reacting?

Electro-Kevin said...

I don't trust cash either.

Tangibles will be key. Precious metals too.

I think for ordinary people we'll be going back to barter. I'm much MUCH more worried about the ineffectiveness of law and order. Once the knife merchants are starving and realise that they won't be put away for burglary...


EXCELLENT post btw.

Electro-Kevin said...


I understand Alice's position. My own is similar.

Our country has such poverty of spirit - it really needs a shock for generating the impetus to galvanise and repair itself.

Simon Fawthrop said...

Having grown up in the 60's and started work in the 70's the stench of collapsing economy and recession is all too familiar.

Having this history I wasn't prepared to believe the new paradigm story from Gordon that bust had bee eliminated and paid off my debts and started saving like mad during the good time. I can weather the storm, although I would rather not have to and would prefer to leave my savings for retirement.

What is also similar to the 70's is the paucity of entrepreneurial spirit. The message that the state will provide for all our needs has become all pervasive. Those who had the spirit to gpo out and generate wealth are accused of being greedy and the rewards of the succesful are taxed at increasingly confisctory levels.

That was the real problem that the Tories had to tackle in 1979 and it will be a similar one that they will face in 2010.

Electro-Kevin said...

Britain is a very different place to the '70s I'm afraid.

I'm not sure how we'll cope but hopefully it will provide the chance to jettison stupid left-wing ideas.

Sadly my working class colleagues are convinced that this is all the fault of 'Thatcher !' - they get very aggressive if I try to explain otherwise.

How the hell does Cameron deal with that ?

Sackerson said...

CU has asked me to comment. I'm flattered that someone thinks my opinion is worth anything, but here's my effort:

There's often a kind of self-destructive excitement as a crisis dvelops, as at the gathering of forces for a war. But the Rupert Brookes will be succeeded by the Wilfred Owens.

I have believed for about 9 years that we are in for an unpleasant time, and that is why I returned to the public sector pro tem at the end of 1999: I really did (and do) think that everybody should prepare for a storm. I have also been encouraging my clients to become/stay cautious, for the last 10 years. I thought we'd returned to sanity in 2003, when the FTSE had halved from its start-2000 peak, but off we went again. From my amateur perspective (and who exactly is an expert on the world economy?), the delay in facing economic reality has allowed the patient's condition to worsen.

Mark Wadsworth's opening comment here was "Sell to rent. Cash is King." Yes, I agree, at this stage. I was talking to my wife last year about selling the house (and, I think, the year before that) but personal circumstances and priorities often trump the cold financial calculations, don't they?

However, I don't think cash will be king for a long period. I can't see the government rapidly shrinking the public sector, and at the same time we shall see reduced earnings, more insolvencies and increasing unemployment in the private sector. The financial sector, which has helped our nation's books to nearly balance, is being hit in banking and investment now, and will (I think) be hit worse in future; that cow will yield far less milk to the Treasury, and so the budget will be even more unbalanced than it is today.

Europe seems keen to enforce a discipline on the Chancellor of the Exchequer, that it has been unwilling to emulate with respect to its own accounts for many years; if the EU continues to take such a rigid line, maybe there will be a tear in the EU fabric, along the line of the English Channel.

Meanwhile, I think Gordon Brown's reputation as a money manager is ruined. As has been said, he failed to fix the roof when the weather was fine. A playboy can seem a financial wizard as long as he keeps partying on his yacht, but the adoring guests will disembark when the holes below the waterline make themselves felt.

(I wonder what would have happened if the Conservatives had won again in 1997? Can we be confident that the consequences would have been better?)

To right the ship of State will take money, or (since we hardly know what faith to place in momey any more) perhaps it would be apter to say, wealth. This, I think, is where the "cash is king" slogan will wear thin. At the moment, we see a devaluation/destocking in houses, cars, computers and other big-ticket items. It's a good time for Loadsamoney to go shopping, even if the price of his dried pasta is up 40%.

But when the stocks have been run down to match shrunken demand levels, and Loadsamoney's firm is on the skids, the game will probably change. RPI is on the up, but now the causes are more external than internal: we have forgotten the lessons of WWII and have become very dependent on imports of food and fuel, which are major components of those inflation indices that aim to reflect the circumstances of the ordinary person. So interest rate rises are unlikely to reduce the cost of such necessities, except indirectly inspfar as they may help strengthen sterling; yet a weakening in sterling is the hope for our trade in manufactures (the pound has dropped 15% or so against the Euro, in the last year). Indeed, we seem to have a policy of shadowing the plummeting US dollar, as once we shadowed the Deutschmark; perhaps, perceiving this strategy, George Soros will stage another coup, to our country's cost, again.

If revenues are down because of recession (or the D-word), where else will the Chancellor find wealth to repair the yacht? More sale of assets to sovereign wealth funds (there goes the family silver)? More bonds sold to trade-surplus foreigners (but will they have the cash, at a time when their own economies may be slumping together with Western consumer demand)?

Left high and dry in public view as the tide of wealth recedes, will be the billions in cash held by the crafty, the nervous and the cautious old. And the subtlest way to steal it is by inflation.

I do not know what will be the best store of wealth when major inflation strikes. All the world's gold currently above ground could be made into a cube that would fit comfortably under the arches of the Eiffel Tower (and historically, a fair bit of it cold have been found not far away from the Tour Eiffel, stashed away in French ceiling-bowl lights). The gold market is small enough to be a prey to manipulation both ways.

Perhaps safer stores of value would be NS&I index-linked savings certificates. If inflation gets too bad, the easy way out for the government will be not to launch new issues, and the old ones have a maximum term of 5 years. There could theoretically be a problem for investors, in the effect of inflation between the date of maturity and the date the money is cleared in the investor's bank account, but we must hope that the government will never permit a hyperinflation.

And I note that landowners such as the Duke of Westminster have rarely sold their land because of temporary monetary inflation. Even if house prices do decline towards 3 times earnings, they will always have a value, and if rented out, will create an income. Perhaps Mark's comment would then be reversed: buy to rent, not sell to rent. Even now, as many try to get out from under the mortgage trap, there are signs that renting out property is a promising sector, since (I understand) demand is increasing faster than supply.

I'd be interested to hear other ideas.

(N.B. I reproduce this comment on my own blog.)

Sackerson said...

P.S. Your point 7 - while the FTSE is around where it was in nominal terms (ignoring dividend reinvestment in the meantime) 10 years ago (Oct. 1998), it is not at a 10-year low, is it - it hit 3,287 at the close of 12 March 2003, according to Yahoo! Finance.

Bill Quango MP said...

BE: Recession can be ridden out, but only for a short time.In the private sector 3 negative quarters usually spells the end of trying to whether the storm and staffing cuts, closing premises, short orders,and cost cutting exercises all begin to be examined.
New jobs become scarce as existing workloads are spread around.Then existing jobs are shed.
Recession goes right through every sector in a domino effect.

House prices fall >
House Builders start lay offs >
Building supply firms lack new orders >
Estate Agents close>
Furniture + white goods retail sales dip dramatically>
Financial and banking cut staff>
Shares fall>
Government can't cut public sector jobs, and looks to increase them.. but falling tax recipts...
Balloon goes up...

Mark Wadsworth said...

What the Great Simpleton says. I'm a tad younger than he, but I can remember the 1970s and the 1990s. What's The Goblin King's excuse?

Anyway, I have summarised my thoughts on all this here

Guthrum said...

This correction is going to be good for UK Plc as long as it is a short one, not on the scale of the Japanese crash which took almost two decades to correct.

Stagflation and a massive State sector to be funded is the threat here.

The only immediate action that the Government can take immediately, is massive tax cuts to improve liquidity in the economy, and to start to hack at some of the sacred cows of the Welfare state, that only deliver 30p of frontline service for every £1 spent, the rest is admin.

We should suspend contributions to the EU, until the books will pass an audit.

This situation needs radical action, not rabbits in headlights at the treasury.

Guthrum said...

Plus end our costly in terms of men/women and treasure, involvement in Iraq and Afghanistan.

Simon Fawthrop said...


Yes there are differences with the 70's:

Inflation hasn't let rip, yet. But as others point out it may be a way for politicians to provide the illusion of easing the pain for those with large mortgages.

The unions don't have the power or base they had then/ Agin, this could be different when the next electon comes along. Labour is in financial trouble and the unions are already saying the price of bailing them out is a repeal of the "anti-union" laws.

Mark Wadsworth said...

I have replied to one of Sackerson's questions on his blog.

Anonymous said...

One of our American cousins suggested yesterday that you split your savings equally between three investments - cash, gold, ammo.

Guthrum said...

Greed and Fear- the twin motivators of the markets

CityUnslicker said...

Thanks for all your comments.

BE - Inflation will be replaced by deflation with the economy tanking as it is at the moment. Moving our interest rates does nothing - as if people are still out recklessly spending money they do not have.

newmainia - thank you, nice to have you back blogging.

Sackerson - good point re the FTSE, that is what I meant. I wonder if we will see 3400 again soon. thanks for your thoughts.

EK - Crime will be a problem in a bad economy, can't disagree with that. Best not live in an area where all the houses are going to get repossessed and made derelict.

Anonymous said...

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
Nothing to do with me Guv. don't owe anyone a bean but, following some of the comments above, anyone got any spare Kruggerands ?

I was 'studying' during the 70's but recall it through the usual alcoholic miasma.

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