The UK economy after the recession-Part 1

26 01 2009

UK economy after the recession

The era of soaring borrowing and the associated boom in finance is over. The government should indeed act as borrower of last resort at this traumatic time. But the aim cannot be to tide the economy over until households start borrowing madly again. For the same reason, attempts to pump up the mortgage market, however understandable, are largely misguided. No sane person would borrow to buy houses whose prices are so likely to fall. Even if the government does get away with its heroic gamble, the longer-term path of the economy must be quite different from that of recent years. Do the government or the British people understand the implications of such a shift? I doubt it. [1]

When this recession comes to an end what kind of shape will the UK economy be in? While we cannot answer this question exactly, there have been some significant trends in recent years which will limit some possibilities and encourage some others. Some of these trends are economic and some are political.

What kind of crisis is this?

As Phil Mullan and others have pointed out, the current crisis hinges on the changed balance of global production. [2]  The decline of manufacturing in the west relative to the east has created a disequilibrium which underlies the global credit crisis. How this disequilibrium is resolved and over what period is impossible to predict. However, it seems unlikely that we will return to the status quo ante. Politics is concentrated economics and the changed nature of global production and the production of wealth has to cause changes in the distribution of world power. 

If we wanted to summarise what has happened to the UK economy in the past ten years it would be as follows.

  1. Investment and growth have remained relatively subdued, compared with previous periods and with more dynamic growth areas, while at the same time being fairly stable.
  2. The UK has benefited from high levels of foreign direct investment.
  3. The finance sector became more important to the UK in both an absolute and a relative sense, and both domestically and in relation to the world economy, while manufacturing continued its long term decline.
  4. Household wealth grew mainly as a result of the housing bubble and the rise in the stock market, which along with easy credit and cheap imports led to a boom in retail consumption.
  5. Total employment grew mainly as a result of the growth of the public sector, funded partly from the growth of the finance sector and partly from government borrowing.

Looked at like this we can see that the crisis has taken a form that presents almost the worst of all possible worlds for the UK. The recession has hit Britain hardest in its most exposed parts.

  1. The crisis began in the financial sector, the most dynamic part of the UK economy, leading to a knock on process through the rest of the economy.
  2. The crisis has become a crisis of credit, thus affecting the ability of businesses, homebuyers and individual consumers to continue to borrow.
  3. Public finances were already deep in the red, limiting the ability of the UK government to use fiscal policy to combat the crisis.

Before we look at each of these points in detail it should also be noted that the political response to the crisis has been shaped by the political culture of the past ten years as well, both from the point of view of governments and from the public.

In many ways this recession has been a crisis of politics as much as of the economy. We shall return to this in the conclusion.

Footnotes:

[1] Martin Wolf Financial Times 24 November 2008

[2] http://www.spiked-online.com/index.php?/site/article/4244/

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