Independent UK: Job losses, homelessness, bankruptcy ... grim, but just be glad we're not Italian

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Economic View: Job losses, homelessness, bankruptcy ... the outlook's grim but just be glad we're not Italian

By Seasn O'Grady
Sunday, 24 August 2008



All agree we're close to recession. The revised GDP figures released last Friday pretty much confirmed that two successive quarters of negative growth – where the economy shrinks, which is the conventional definition of "recession" – cannot be far away. In case you hadn't noticed, the economy ground to a halt in the second quarter of the year, and almost every leading indicator suggests that activity will slow further over the next year. But how bad will things get? And what will be the consequences?

Things don't look great, but we needn't get too apocalyptic either. Let's take a peak at the dark side first. While household spending fell last quarter, by 0.1 per cent, by far the biggest drag on the economy is the decline in investment. In the first three months of 2008 it was down by 1.5 per cent on the last quarter of 2007; it has now dropped by another 5.3 per cent. That magical, elusive ingredient – confidence in the future – seems to be ebbing away.

There is a further point worth making here: cuts in investment – buying new kit for offices, factories, design studios, farms and the public services – will reduce economic growth way into the future. As we spend less on renewing the productive capacity of the economy, so we reduce our ability to create wealth in the months and years ahead. In particular, we will suffer from the sharp decline in construction; the long-term housing shortage in the UK is about to get a little bit worse. This slump in investment will damage, permanently, the productive capacity of the economy and reduce its long-term rate of growth. The recession of 2008-09, even if it turns out to be short and shallow, will cast a long shadow.

So far, so miserable. The brighter news is that we are at last getting some benefit from the pound's 12 per cent devaluation since last summer. Exports are down, in truth, because of the general slowdown in the world economy, and especially in the eurozone, our largest trading partner and itself not far from recession. But imports are down even more. The sad thing is that we're not selling as many of our wonderful Minis, bottles of Scotch and Norman Foster buildings abroad as we would like, but the situation would, we can safely conclude, be an awful lot worse if it hadn't been for sterling's tumble. So the weak pound is doing us good, and pushing the UK economy towards a much needed rebalancing in favour of exports and manufacturing. ......(more)

The complete piece is at: http://www.independent.co.uk/news/business/comment/economic-view-job-losses-homelessness-bankruptcy--the-outlooks-grim-but-just-be-glad-were-not-italian-906784.html