Recession over but tough 2010 for UK
17 December 2009 2:13am
THERE will be so many challenges confronting the British economy next year that it is hard to know where to start. The last remaining hard-core bulls, who still believe in a v-shaped recovery, will be bitterly disappointed; to a lesser degree, so will the perma-bears, who are still convinced that the UK banking system is so broken that we are about to face another financial crisis, an imminent relapse into recession and the end of civilisation as we know it.
On balance, however, I qualify as a moderate bear: the recession is over, the banking system is beginning to work again but GDP growth will be paltry – not only in 2010 but for several years to come. That, if anything, is the best-case scenario. Several major threats remain that could derail – and even destroy – the recovery. The central problem is that we have borrowed ourselves out of a crisis caused by too much debt.
One result of this has been the explosion in the budget deficit to around £190bn for the next couple of years, a ludicrous state of affairs. Whoever wins the next election will have to slash public spending; if this doesn’t happen, or if we end up with a hung parliament, we will face a real government debt crisis, with dire consequences for the UK and everybody who lives and works here.
The deficit has only been manageable thanks to quantitative easing, which has mopped up the new gilts. What will happen when this ends – and when interest rates start to rise? How will we cope? Another worry is that there has been no real retail recession. Consumers have cut back but the savings ratio, while improved, remains low. In the years ahead, we will have to save far, far more.
Another result of the government’s policies has been that – unlike in the US – the British housing market is once again in a bit of a bubble. The six to seven per cent bounce back in prices in recent months is absurd; prices could easily fall by another tenth or so next year. This is one of the greatest risks facing the UK; banks could be hit by another wave of write-offs, causing real damage.
Inflation is also back. This is partly due to quantitative easing – but not in the way most people believe. Money-creation causes consumer price inflation when individuals and companies end up with too much cash in their bank accounts (or pockets) and begin to spend some, bidding up the price of goods and services. But while QE has undoubtedly prevented the amount of money circulating in the economy from collapsing, it has not led to a strong rise. What has changed is that the rate at which the cash is changing hands has gone up – and there has been growth in very liquid assets that have the same economic effect as money. But QE has also led to a collapse in sterling, the biggest driver of the consumer price rises.
Another challenge is the reduced attractiveness of London as a place to conduct business, which will chase away jobs and investment. Many global firms in Asia and elsewhere are listing on exchanges other than London, a harbinger of things to come.
Yet global growth is likely to be strong this year, helping to prop up Britain – in fact, that will be the only real good news of the year. We are having to pin all of our hopes for 2010 on recovery in economies other than our own. Globalisation has had a bad press recently – but without it we would be in even deeper trouble.
In other news
The Chinese city of Guangzhou may have banned Uber, but that hasn’t stopped its municipal government setting [Read more]
Labour has performed a balletic U-turn this morning, abandoning its opposition to EU membership referendum. [Read more]
Greece’s interior minister has said that the country cannot afford its 5 June payment to the International Monetary [Read more]
Young people aged 16 and 17 years old should be given the chance to vote in a EU referendum, according to the [Read more]
The Bank of England is carrying out a confidential investigation into what would happen if the UK left the European [Read more]
This year's Eurovision Song Contest will feature an addition to the normal line up – for the first time ever, [Read more]
Tonight is the 60th Eurovision Song Contest, and once again we're in for an evening of cheesy music and crazy [Read more]
The Eurovision Song Contest is getting more and more expensive, despite Europe's decline into austerity. [Read more]
There were delays of up to 30 minutes to trains in and out of Kings Cross Station, after the station was re-opened [Read more]
When a 20-year-old footballer publicly declares he wants to leave a club and his agent hurls insults at one of [Read more]
The outbreak of bird flu in the US is leading to an unprecedented situation for companies reliant on eggs – [Read more]
Germany's finance ministry has denied reports it was considering offering Greece its own parallel currency. [Read more]
Chancellor George Osborne was given a boost today, as higher tax receipts helped shrink the deficit by more than [Read more]
Beleaguered spread-betting firm Plus500 today suspended trading in its shares on London's junior market, following [Read more]
The news that card and electronic transactions have overtaken cash as the UK’s preferred method of payment is [Read more]
Despite the crippling effect of election uncertainty, offers received in April were up 15 per cent on last year [Read more]
Former secretary of state for communities and local government Eric Pickles is to be knighted, 10 Downing Street [Read more]
Network Rail engineers have destroyed the Abbey Wood station as part of the Crossrail development that is expected [Read more]