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The UK economy: “Bad next year, but not quite as bad”

The UK economy: “Bad next year, but not quite as bad”
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HSBC Chief Economist, Dennis Turner

At a keynote talk by chief economist for HSBC Bank Dennis Turner, at the launch of a new Orega business centre in Colmore Plaza last Thursday 26th November, the outlook for the UK economy in 2010 was marginally optimistic.

Addressing a 60-strong audience at Orega’s new serviced offices in central Birmingham, Dennis claimed that 2010 would be “bad, but not quite as bad”. He delivered a compelling speech that charted the past, present and future of the UK recession. And while national debt is expected to reach record levels, he claims that the UK will finally return to growth next year – albeit slowly.

“Our economy, very simply, has unravelled because we relied too much on growth, jobs, and profits,” he said. “We relied disproportionately on consumers who spend and borrow too much, and Governments which spend and borrow too much.” He states that there was a lack of the “good guys” – investment and export – which led to “a very unbalanced economy.”

Dennis likened the onslaught of the UK recession to watching a train crash with two locomotives heading towards each other.

“One is called the ‘Economy’ – it was slowing down. The other is called the ‘Credit Crunch’ – it was getting worse.” He expressed that the UK hoped and expected that the Government would step in and build a detour line, to take the credit crunch away from the economy, and thus avoid a head-on crash.

“By head-on crash I mean major institutional failure,” said Dennis. “That’s not on the agenda anymore. But there is going to be collateral damage. While the credit crunch did not cause the economic slow down, the collateral damage from the credit crunch will have a major impact on the pace and direction of economic recovery.”

Until the recession took it’s toll, Dennis claimed that UK businesses had “had it so good for so long” with sustained low inflation and GDP, low interest rates and a strong and stable pound.

“What caught so many people out – economists in particular – over the last 12 months, is that it was so good for so long.” Referring to the troubled economy of the 1980s, he said: “We never thought we would be back here again”, adding that this recession has been a “new experience”.

He stated that what UK businesses want, above all else, is stability. “The authorities believed that if they could deliver on the Holy Trinity – inflation, base rates and exchange rates – you will get from the Government what you want most – a stable economy.” But unfortunately, Britain experienced the “wrong sort of growth”, driven by consumer spending fuelled by high levels of borrowing, which could not be sustained.

A massive ┬ú1.5 trillion was borrowed last year which Dennis says equates to each person in the UK owing an average of 19 months’ pay, and as a result, the national average of borrowing reached 160%. He explained that it would take 120 years per person to unwind this debt, which therefore creates “a bit of a problem for consumers.”

As the economy unravelled, the Government was forced to borrow. Lack of investment and an increase in public sector spending – again fuelled by borrowing – led to a very unbalanced economy.

“It was fine and dandy when it first started,” said Dennis. “Government tax receipts were higher than their spending, leading to a fiscal surplus. But then he (Gordon Brown) started to spend. Tax receipts weakened. Surplus became deficit. Gordon Brown was spending money he didn’t have, so he did what we had to do – he borrowed.”

Growth became slow, and 2009 was a bleak point for the economy and UK businesses. But with the worst apparently over, and 2010 looking to return to growth – albeit gradually – Dennis believes that we have finally embarked on the road to recovery.

“It’s a slow climb uphill, but we’re on the way.”

Despite some claims of a ‘W’ shaped recession, in which the economy would begin to improve and then plummet sharply again, Dennis believes we are in more of a ‘U’ shaped recession. This is the middle ground between optimism and pessimism, with the bottom of the ‘U’ representing a neutral period, followed by a steady growth rate back up to positive levels.

The recession will be deep but short, he says. And interest rates are currently at their lowest since 1694, which bodes well for the consumer, for investment, and for the outlook of the economy.

However although debt is affordable, thanks to low interest rates, this optimism comes with a “health warning”. National debt is currently soaring to record levels, with net government debt set to reach record post-1945 levels next year, at ┬ú175bn.

“That’s a huge debt,” he said. “The Government is spending ┬ú175bn more than it is taking in taxes, which is equivalent to 12% of GDP. ThatΓÇÖs how much money they are pumping into the economy. ItΓÇÖs the first time ever a deficit has exceeded ┬ú100bn.”

But Britain is not alone in this debt forecast. Dennis claims that the trend is global: “If it is 75% in Britain by 2013, it compares with 60% in Germany, over 70% in France, and 90% in the US.”

While the borrowing capacity is there and rates are low, consumers are expected to help fuel the recovery, as “everybody’s expenditure is someone else’s income.” And with a dramatic loosening of fiscal and monetary policy, “the medicine now appears to be working.”

Signs such as an upturn in house prices and a return to stock building suggest that businesses are moving from contraction to expansion. And although there is a long journey ahead, Dennis expects that it could be business as usual in 2011, when we can expect a return to “more normal levels – 2% inflation, 4% interest rates and 2.5% growth.”

Commenting on the recovery, Dennis adds: “We need to return to industrial investment and exports, and the policymakers need to consider what will attract major manufacturers to set up in the UK – this is what matters most in the global economy. The government must adopt a business-friendly strategy that stimulates manufacturing and exports if we are to remain competitive on the world stage.”

The biggest problems now for the consumer are debt, and an increase in taxes. More people have borrowed money than ever before, and to help steer the economy back on track, consumers are likely to face one of two solutions – an increase in taxes, or “an axe to public spending.”

As Dennis points out, neither will be popular, and both will be painful. Plus, the Government have another problem ΓÇô timing. “Nine months before an election is not a time to expect politicians to be brave.”

So along with the UK business community, we will watch the outcome with interest.

What are your thoughts on the UK economy, and how do you think the Government should approach the issue of national debt? Leave your comments below.

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Author: | December 1, 2009 | 0 Comments

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