In 2009, recession shook Britain as the economy shrank at its greatest rate since the war, bringing business closures, spiralling unemployment and a housing market collapse. The year 2009 was shocking for the world economy. Global output fell for the first time since the 1930s depression, yet it was possibly not quite as hard-hitting as many had feared twelve months ago, when the whole fiscal system was close to breaking down.
The authorities’ reaction was immediate. They cut interest rates, boosted money supply and spent further, in particular subsidising consumers who wanted to buy a new vehicle. How economies will respond when such stimulate is removed in the approaching months is yet to be seen. In the United States unemployment has soared to ten percent – not as bad as the 1930s when the figure was twenty-five percent, but a shock nonetheless. More gloom is on the way, with public borrowing en route to knock £178bn; Alistair Darling, the Chancellor, using his Budget and pre-Budget report to declare plans to borrow another £700bn, a new fifty percent top tax rate for those earning more than £150,000 and a penny on national insurance.
The two key parties remained split over the best approach to financial revival; the Tories accused Gordon Brown of irresponsible borrowing, while the Government claimed that David Cameron’s plan to cut the deficit would stifle the recovery. Experts spent all year telling the Chancellor he had to increase taxes and slash spending. In reply, Alistair Darling trotted out a Fiscal Responsibility Bill, vowing to halve the gaping deficit in just four years. To pay for this he mugged the middle classes, slapping a 50pc tax on those earning above £150,000 a year, raising National Insurance and dragging 70,000 extra into the 40pc tax band. He also pledged big expenditure cuts – but not until after the General Election.
Pay, predominantly for bankers, remained a continuing argument. With Christmas in view, Mr Darling used the pre-Budget report to tax bankers’ bonuses. Banks like Barclays and Goldman Sachs didn’t assist by restoring large bonuses after profits. The tax came months after G20 leaders in Pittsburgh called for bankers to show control. Higher taxes and extra regulation led to warnings of an exodus of bankers from London, delighting rival financial centres. Mockingly, resurgent banks aided Britain improve its services sector. The ex-CEO of the Royal Bank of Scotland was the closest Britain got to a public villain in 2009. The scene of him enjoying a £700,000-a-year pension first surfaced in February and kicked up a storm of objection for nearly six months. Shareholders voted down the plan in a protest vote after RBS posted a record £24bn loss – the largest in UK corporate history – and cut tens of thousands of jobs. The vote had no lawful power, but Sir Fred finally handed back £4.7m.
There WILL be so many hurdles confronting the British economy next year that it is hard to know where to begin. 2010 is going to be a hard year. If 2009 was the year of the unexpected, 2010 may turn out to be a year of the unwanted – all ghosts that we feared may actually return to trouble us. Forecasting the UK economy in 2010 in the midst of such economic uncertainty and financial upheaval is, to put it mildly, a challenge.
Britain’s economy is set to keep shrinking well into next year, despite all or most of its principal competitors having begun benefiting from renewed growth and recently the International Monetary Fund has issued a statement urging caution. In a brutal blow to Gordon Brown’s hopes for an economic revival to take hold by Christmas, the IMF will forecast that the UK economy will shrink in 2010 by an additional 0.2 percent. A 3.8% contraction this year that would be the sharpest since 1944, much worse than the 2.8 per cent that was forecasted only in January. The new, even harsher prediction comes ahead of official unemployment data that is set to show that numbers out of work soared above two million during January. Mervyn King, the Governor of the Bank of England, warned of the danger of a return to an era of mass joblessness. Speaking to bankers at the Mansion House in London, he highlighted the “extraordinarily sudden, severe and simultaneous downturn of activity and trade in every corner of the world economy” since last autumn.
Several key threats linger that could disrupt – and even wipe out – the recovery. The inner crisis is that we have borrowed ourselves out of a calamity caused by too much debt. One consequence of this has been the outburst in the budget deficit to around £190bn for the subsequent years, an absurd situation of affairs. Whoever wins the next election will have to cut public expenditure; if this does not ensue, or if we end up with a hung parliament, we will face a genuine government debt catastrophe, with dismal consequences for the UK and everyone who lives and works here. The deficit has only been controllable thanks to quantitative easing, which has mopped up the new gilts. What will happen when this ends and interest rates rise? How will we manage? Another concern is that there has been no real ‘retail recession’. Consumers have slashed back but the savings ratio, while improving, remains low. In the years ahead, we will have to save a lot more.
Another effect of the government’s policies has been that – unlike in the US – the UK housing market is once more in a bit of a bubble. The 6-7% spring back in prices in recent months is ridiculous; prices could simply fall by another tenth or so next year. This is one of the greatest risks opposing the UK; banks could be hit by an additional wave of write-offs, causing major problems.
Inflation has returned! This is partially due to QE– but not how most people believe it to be. Money-creation causes CPI when individuals and companies end up with too much money in their accounts (or pockets) and start to pay out some, bidding up the value of goods and services. However as QE has certainly prevented the quantity of money circulating in the economy from crashing, it has not led to a great rise. What has altered is that the speed at which the currency is shifting 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 slip in sterling, the biggest driver of the consumer price increases. Another challenge is the reduced magnetism of London as a city to carry out business, which will force away jobs and investment. Many worldwide firms in Asia and elsewhere are listing on exchanges other than our capital; perhaps a forerunner of things to come.
The economy is expected to recover in 2010, but give the depth of the recession; output is well below full capacity. It would take a long period of economic growth to overcome the spare capacity.
Yet global growth is likely to be good this year, helping to support Britain. In fact, that will be the only genuine good news of the year. We have to attach all of our hopes for 2010 on recovery in economies other than our own. Globalisation has had a bad press recently, yet without it we would be in even deeper trouble. If this decade has taught us something, it is that the country is over reliant on the financial City and the tax revenue it generates for the Treasury.
Yes, we are coming out of this recession – we’ve spent so much money, of course we are. The trouble is that as the economy recovers, banks feel more comfortable about putting businesses into receivership, whereas companies, rather than hiring a lot of new people, will continue to run as lean as possible. Another big uncertainty is how savage cuts in public spending will be and how far taxes will rise. Those two things will put a damper on any recovery, but they’ll be necessary to repay the ludicrous amount of public debt we now have.
The Young Economist strikes again! I love your writing style sir! Lovely, informative and in depth article!
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Nice work dude!
Very interesting read.
Thanks!
Young Economist, you write very well!
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Cheers!
Well written with a good narrative manner.
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