It’s official. Britain will be the sick man of Europe this year. Indeed it will be the sick man of the world. The International Monetary Fund’s forecast that the economy will shrink by 2.8 per cent puts Britain at the bottom of the league for all large industrialised economies. Only Japan, with a predicted fall of 2.6 per cent, comes close.
On top of the contraction already seen in the last quarter of 2008, the IMF’s forecast would mean the economy shrinking by more than 4 per cent in only 15 months. The figure may not look that dramatic but in economic terms it represents a very sharp and deep recession.
That sort of decline will bring a sharp fall in many companies’ profits and they will cut costs in any way they can, exacerbating the slowdown. It will mean a sharp increase in the number of people losing their jobs, homes and businesses.
What is most shocking for many people about this downturn is how quickly Britain has gone from boom to bust. So recently the Government was boasting that the country had put its disappointing economic record behind it and had become one of the healthiest economies in the world. Now it seems that Britain is again bringing up the rear, raising memories of the miseries of the 1970s.
Gordon Brown is at pains to blame Britain’s woes on the credit crunch, which began in America. But the fact is that Britain — because it was particularly vulnerable to the financial crisis — is expected to suffer more than America, which is predicted to contract by 1.6 per cent next year.
Opposition accusations that Labour’s acts and omissions left the economy particularly exposed are hard to rebut. While carefully adding that he hoped the IMF forecast was wrong, George Osborne, the Shadow Chancellor, said that Britain was set to endure the worst year for the economy since 1948. “Without a change of direction we will be living with Labour’s debt crisis for generation.”
One of the vulnerabilities is the size of Britain’s financial sector, and especially the size of its banks in relation to the economy. Some commentators have compared Britain with Iceland, which has been financially crippled by the collapse of some of its very aggressive banks.
This is too alarmist. Icelandic banks have relatively much higher liabilities than British banks. And Iceland has the added problem that many ordinary people took out mortgages in euros and have watched their debts balloon because of the sharp fall in the Icelandic currency.
Nonetheless, the liabilities of Britain’s big banks are very large compared with the economy, which makes their problems that much more difficult to deal with. The IMF said yesterday that the global recovery would not be possible until the banking system began functioning again.
Not only has the Government had to fill particularly large holes in some of the banks’ balance sheets but there has also been a sharp contraction of lending because of the importance of international banks, such as the Icelanders, and non-banks which have pulled out of the market.
Some British banks were also unusually dependent on funding from the wholesale markets rather than from retail and corporate deposits, which left them struggling when inter-bank lending dried up.
The importance of the City, as a very big contributor to the economy and to tax revenues, means that the collapse in activity linked to financial markets has had a much bigger impact in Britain than in most other countries.British consumers also have very high levels of borrowing, which makes the impact of an economic slowdown that much more painful.
Mr Brown’s critics argue that the strong growth in the British economy in recent years was largely, if not entirely, driven by debt. Consumers borrowed to buy houses and holidays while the City boomed on the back of abundant credit, growing too big for the size of the economy, while manufacturing continued to decline. Now that the credit bubble has burst, Mr Brown’s claim to have ended the cycle of boom and bust has burst with it.
Britain also experienced one of the world’s most extreme property bubbles, and the fall in house prices is expected to cause even more damage in Britain than in the US. House prices are forecast to continue falling this year, with economists expecting them to bottom out at an average of 30 per cent off their peak.
The first wave of job losses last year came in construction, because of a slump in housebuilding, and property- related services. Then came the layoffs in financial services and in the car industry, where sales have collapsed.
But an economic contraction of 2.8 per cent this year will mean significant job losses across a broad cross-section of the economy. Unemployment rose by 78,000 in December and economists expect 700,000 more to join the dole queues this year.
The IMF’s gloomy forecasts take into account all the Government’s efforts to rekindle growth, by supporting the banking system, cutting taxes and promising increased spending.
Further measures are expected in the April Budget. But at the World Economic Forum in Davos yesterday there was wide agreement that whatever the Government does the British economy will remain very sick for the rest of the year and beyond.
Who are they and what do the numbers mean?
The IMF The International Monetary Fund was set up in 1944 as part of the Bretton Woods agreement that also created the World Bank. It is known as the lender of last resort to which countries can turn when they cannot raise money anywhere else. The IMF bailed out Britain in 1976, lending it
£2.3billion
The IFS The Institute for Fiscal Studies, a British think-tank, was set up over dinner at a café in 1969 by four City professionals. The organisation, which is a registered charity, was set up to provide information to MPs and ministers in an effort to promote clear and transparent financial legislation
The ILO The International Labour Organisation is the UN body that shapes international laws on labour and produces regular statistics on jobs. It was awarded the Nobel Peace Prize in 1969. Burma recently threatened to withdraw from the ILO after coming under pressure to stop the army’s practice of forced labour
-2.8% This fall in GDP would mark the deepest slump in Britain’s economy since the Second World War, and a truly vicious recession. The shrinking of the economy would be twice as bad as 1991 — the worst year of the Nineties recession — and be much worse than the decline of 1980 severe as the 1.4 per cent plunge suffered in 1991, the year in which the early Nineties recession took its worst toll. It would also eclipse by far the 2.1 per cent drop in GDP endured in 1980, and the 2.7 per cent decline
£20 billion The amount that the IFS says the Government will have to find each year by 2014 to bring the national debt back to pre-crisis levels of under 40 per cent of national income. This is the equivalent of 5p in the pound on the basic rate of income tax — or an extra £1,000 a year for the average taxpayer. That spells an extra tax bill of £1,000 a year for the average taxpayer. For a higher-rate taxpayer earning £50,000 a year, it would represent a bill of £1,740 a year
50 million jobs The number of people around the world that the UN’s International Labour Organisation ILO expects to lose their jobs as a result of the economic crisis. The UN’s worst-case scenario envisages that global unemployment will reach 230 million, compared with 190 million at the end of last year and 179 million in 2007. It believes that at least 18 million — and probably 30 million — people will lose their jobs this year. If 50 million workers were thrown out of work, 7.1 per cent of the global workforce would be unemployed. In Britain, unemployment is expected to pass 3 million by early next year — or about 9 per cent of the workforce
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