Tweet
Normally around this time you wish everyone a happy new year and think of reasons to be cheerful. But that is a tough one given that the economy in 2009 is facing its worst year since the second world war.
While we are off the map as far as where we are going, we can be confident, unfortunately, that a million people are going to lose their jobs. A million.
The economy began to turn down in earnest last year amid collapsing house prices and banks but this year is going to be a whole lot worse as the credit crunch exacerbates and gives way to a deep recession and lengthening dole queues.
We are in uncharted territory because we have never had such a credit crisis in the middle of a recession. Usually recessions are caused by a leap in oil prices or a jump in interest rates but this time is not the same at all so we don't know how bad it is going to get.
Unemployment rose from 1.6 million to almost 1.9 million between January of last year and October - the latest month for which there is data available. It is likely that when the December figures are released in February, they will show a total of 2 million unemployed. Many experts think that will rise to 3 million in the current recession.
After all, it did in the recessions of the early 1990s and 1980s so there is no reason to think that won't happen this time. Friday's manufacturing survey from the CIPS showed employment in the sector falling at its fastest pace in the report's 17-year history.
It is anyone's guess how long this recession will last but, given the high levels of household and financial sector debt, it could last longer than usual. We have already had two quarters of contraction - the third quarter of 2007 saw the economy shrink by 0.6% and the fourth quarter will doubtless show an even bigger fall when the first estimate is released this month, confirming what we already know - that we meet at least the technical definition of a recession as two consecutive quarters of contraction.
British recessions of the postwar period have typically seen five consecutive quarters of contraction. So, on an optimistic view, we could already be half way through this one. But you shouldn't bet on it.
Many economists are pencilling in a contraction of 2-2.5% for 2009 as a whole - twice what the chancellor, Alistair Darling, forecast in November's pre-budget report.
There is only one year in the postwar period that can match that - 1980 when the economy shrank by 2.1%. So we could easily be entering the worst year since records began in 1948.
And we could well suffer more than five quarters of loss of output, especially with Barclays' chief executive John Varley warning that bank lending may not return to normal for another two years.
Free-flowing credit
Modern economies - especially Britain's - depend on credit flowing freely through the economy and that is still not happening more than a year after the credit markets froze in August 2007 and a month later brought down Northern Rock.
So the question is, what on earth can be done about it?
The good thing is that the Bank of England, prompted by monetary policy committee member David Blanchflower, has woken up to how bad things are. Between October and December it cut interest rates sharply to a joint, all-time low of 2% and is almost certain to cut them again this week, probably to 1%.
Many analysts, who have also finally woken up to how bad things are, expect rates to be cut to zero or thereabouts in the next couple of months. The Bank and Treasury are also working on non-conventional measures to reflate the economy, known as "quantitative easing". This is born out of a concern that reducing the cost of credit is all well and good but it may not make much difference if that credit is not available.
This is likely to involve the purchases of instruments such as government or corporate bonds from domestic holders of those bonds, thereby pouring extra cash into the economy.
The Treasury, which is panicking about a so-called "liquidity trap", is leading the way on this new kind of policy, in addition to Darling's tax cuts in the pre-budget report.
All of which means that policymakers are throwing the kitchen sink at this recession in order to bring the economy back from the brink. They may also have to take further actions to fully nationalise several banks if lending remains frozen.
The budget deficit and national debt are blowing out as Darling risks everything to stop Armageddon. The government may well have to launch a US-style fiscal stimulus worth, say, £100bn to try to prevent a depression. It is already urgently considering measures to stop unemployment going through the roof.
There will be a hangover in the future as the deficit and national debt have to be brought back under control but in the short term that is not the issue.
One good thing as far as hard-pressed consumers are concerned is the fall in the price of oil. That has brought petrol prices down and will also eventually be reflected in lower gas and electricity bills, putting some money back in people's pockets.
Prices of many goods in shops are also being slashed as shops try desperately to persuade us to part with our cash. The effects of falling oil and goods prices threaten to push us into deflation this year - something else policymakers are desperate to avoid, knowing how harmful the Japanese deflation of the 1990s was.
Firms, particularly exporters, are in theory being helped by the big fall in the pound's value over the past year. The problem is, though, that world demand is so flat it may not help them increase sales volumes. But it will, at least, help margins.
Taken together, there is a huge easing of policy and monetary conditions to offset the effects of the credit crunch. The playing out of these two opposing forces will determine to a large extent the point at which the economy begins to pull out of this recession.
First-time buyers
There is another uncertainty and that is the housing market, where prices that are in freefall could have a long way further to fall. A few new year estimates from bodies with a vested interest say we are close to the bottom. That seems very unlikely. Prices have fallen 20% from the peak in the autumn of 2007. Add in inflation at about 6% over that period and you have a real terms correction of a quarter.
True, interest rates are now very low. But so are mortgage approvals - at a record low in fact. First-time buyers can't get loans and don't want them anyway because house prices are falling.
A year ago I forecast that house prices would fall by a third in nominal terms in this downturn. That would mean roughly another 15% from where we are now. That is now looking conservative - especially as they were so over-valued at the beginning of the fall and because house prices tend to overshoot on the way down as well as on the way up.
That is, of course, good news for all those who have been unable to get a foot on the property ladder over the last decade or more. And it is also good because it teaches people that house prices are not a one-way bet - something that far too many people had forgotten in recent times.
ashley.seager@guardian.co.uk
- Economics
- House prices
- Recession
- Property
- Unemployment and employment data
- Manufacturing sector
- Banking
- Market turmoil
guardian.co.uk © Guardian News & Media Limited 2009 | Use of this content is subject to our Terms & Conditions | More Feeds
More...
