Recession ahoy?

The British Chambers of Commerce latest survey makes bleak reading. Small businesses, which were very chirpy about the outlook only a month ago, are suddenly full of fear, reporting falling orders. The BCC itself has become the latest to signal recession.

There were Wall Street analysts telling us the US was in recession at the beginning of the year. Instead, so far we have just had a sharp slowdown. There have been doomsters calling recession for the UK this year, but so far we have had two quarters of painfully slow growth. I am holding to my forecast that we might get by without a full recession in the US, where they have taken action with low interest rates and tax rebates to try to turn the economy round. The UK is now wallowing from a monetary authority that is getting it wrong both ways – too loose on the way up, and now too tight on the way down, so it is a closer call here.

Within the overall pattern of no growth or slow growth, certain sectors will experience a very painful recession. In both economies property, building and construction are in freefall, and banking is going through a nasty squeeze. With a low dollar and falling pound both economies should see better export performance, as their manufacturers are priced back into world markets during an inflationary period.

The situation in the UK is both ameliorated short term by excessive public spending, and made worse in the medium term (two years) by the over borrowing of the public sector to pay the ballooning bills. Yesterday in the Commons it was Supplementary estimates day, when the government seeks Parliament’s approval for some of the overruns so far this year. We were only allowed to debate concessionary fares and the science budget. The more interesting estimate before us was the stonking £5,300 million extra cash estimate for Northern Rock resulting from the transfer of a Bank of England loan that previously had not appeared in the figures. No Treasury Minister was on hand to give us an update on how big the trading losses and redundancy costs are likely to be, and how long it will take to get the loans back that the Treasury and Bank have extended. You don’t get much explanation for £5.3 billion from this government! It is typical of a regime that spends other people’s money as if there were no tomorrow, and now thinks borrowing any amount it likes is fair game. They may discover the day of reckoning for their excess comes before the General Election.

In today’s Independent there are rumours of £7.5 billion of overrun on the public accounts. The way this government is spending, I think the final total above budget this financial year will be higher than that. The short term impact on activity will be far less than the medium term adverse impact from the higher interest rates and lost confidence as the government’s financial plans unravel. If only the PM would bring back Prudence, we would have some better options.

In the meantime there is action the government should take to fight recession. It should press ahead with the permits, licences and competitions necessary to organise large scale programmes to increase transport, energy and water capacity. It is an ideal time to do it, when the construction industry is facing large cuts in workload and workforce. That is something we could all agree about, and something which would help UK competitiveness in the next upswing.

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11 Comments

  1. Cliff
    Posted July 8, 2008 at 4:19 pm | Permalink

    We have talked ourselves into it.
    Doom monger after doom monger on al-beeb gleefully telling people how bad it is getting and how it will get worse.
    Again, if you were thinking about buying a house, would you? after all the doom mongers are saying prices will drop by a further twenty percent over the next year or so which means, if you buy a £300000 house today it will be only worth £240000 in a year or so…..No one will invest in something that will loose such an amount in such a short space of time…..Commonsense really.

    People I believe are holding back on putting their houses on the market, partly due to the downturn, but also due to the HIPs rules. If the market it slow and the house does not sell very quickly, one will have to pay for another HIP pack and then perhaps another.

    John…A straight question for you that could be answered simply yes or no; Will a future Conservative government get rid of the HIP rules?

    Reply: yes, as I understand their position.

  2. Matthew Reynolds
    Posted July 8, 2008 at 6:37 pm | Permalink

    Cutting public spending to halve the PSBR in three years & by 75% in four years would be sound . QUANGO’s , consultants , civil servants and procurement all cost the taxpayer far too much money . To start with money from spending cuts could fund reducing coporate tax to one 20% rate and then on paying off some of the extra public debt caused by Gordon Brown’s politically motivated client state . Lower business tax would stimulate productivity , job creation etc and smaller government would be a pro-growth way forward . Eire proves that such policies work given time . QUANGO’s can be axed or merged or hived off while double the number of civil servants can be axed than Gershon suggests while consultants cost to the taxpayers needs cutting in half as they are a pointless expense that does nothing to improve schools , hospitals , transport or to reduce crime . Procurement costs need cutting with a greater use of market forces thus ensuring a sounder distribution of economic resources . JSA & IB can be replaced by one sort of payment designed to slash economic inactivity while Housing Benefit & Council Tax Benefit need an overhaul to deter long-term unemployment and to ensure that these payments do not cause the working poor the kind of poverty trap that they do under Labour . This would reduce unemployment by tackling welfare dependency and lower corporate tax & smaller government would boost growth and thus supply the necessary jobs . Once the PSBR has been wiped out the basic personal allowance could be raised to say £14,000 p/a for all taxpayers ( better than a low personal allowance & complex Age Related Allowances ) to ensure that no one loses out from the end of poverty creating tax credits that diminish the more one earns . My ideas on fighting inflation by giving the Bank of England greater powers , a better inflation target and more independence ( see previous responses ) would stop the price spiral . Public spending growth could be cut to such a level so that we can get 20% corporate tax & a balanced budget within five years . It is high public spending & borrowing that explains the fact that the UK will suffer more from the global problems as does our feeble monetary policy / financial regulatory framework . We as a Party cannot attack Labour and then pledge to offer more of the same and promising lower inflation , cuts in public borrowing , faster GDP growth and a reduction in unemployment by offering costed policies might be good . We should also allow small & medium sized firms to opt out of as many rules as possible to help achieve those objectives .

  3. William B.
    Posted July 8, 2008 at 7:25 pm | Permalink

    When the excrement of wasteful government hits the fan of real people's pockets it makes little difference whether the result is a slow-down to tiny growth or to negative growth. It's still the little people who are hit hardest. If you use a baseball bat to break my right tibia it adds little additional pain when you then break my right fibula as well.

  4. John
    Posted July 8, 2008 at 7:38 pm | Permalink

    My son who works for a multi-national came home last night with a letter from the CEO stating there would be redundancies, shifts cancelled, factories mothballed as they expected the sharp downturn to last at least 18 months. The main developer at the nearby proposed eco-town at Marston Vale has pulled out today.
    Local Post Office closures also announced today.
    Local transport company, trading for years, just gone into liquidation.
    Not looking good at all.
    And all Gordon does is tell us not to waste food.

  5. David morris
    Posted July 8, 2008 at 8:21 pm | Permalink

    Never fear. Britain is best placed of all the countries in the Western World to ride out this temporary global problem. I just heard the PM say this on his Broadcasting Company, so it must be true.

  6. Puncheon
    Posted July 8, 2008 at 8:50 pm | Permalink

    John – I completely agree with you about the opportunity for state funded infrastructure projects. I would not mind at all paying the extra petrol tax if I knew it was going on big transport projects – something that has been neglected for years. We desperately need a modern national road and rail network, particularly east/west. Also, we should be commssioning and building nuclear power stations to provide secure base load generating capacity for the future. I agree that nuclear is uneconomic, just like wind -power, but unlike the latter it provides constant, secure base load generation. The problem is how do we have state funding without state interference in the projects – PFI is clearly not the answer. A question for you: how would you manage this if you were in charge?

    Reply: I have in mind private finance – toll funded new roads and power paid for by customers.

  7. ANDREW BULL
    Posted July 8, 2008 at 10:53 pm | Permalink

    John, I am glad to see that you advocate using the downturn to implement big projects in transport and ther infrastructure projects. This will help keep people employed and compaies viable during a period of higher unemployment and lower profits. Keeping people employed and less directly dependant on the state is very important. Failure to do this in the early years of the Thatcher government was a very big mistake, one for which our society is still paying in terms of people now being to quick to rely on the state for their well being.

  8. Freeborn John
    Posted July 8, 2008 at 11:41 pm | Permalink

    My US company is working on the assumption that the slowdown in the US will be restricted to specific sectors, notably finance and construction, and will be behind us by the end of the year.

  9. Derek
    Posted July 9, 2008 at 1:03 am | Permalink

    Believe me, High St spending has not just slowed, it has almost completely stalled. This financial tsunami will rip through the economy. There's currently a semantics argument about when we're in a recession, we will experience a quite severe recession at least. Much is made about 'let's be careful not to talk ourselves into a recession'. It is, in my opinion, nonsense. What we're experiencing could never be talked into, or out of, it is the inevitable result of extensive egregious decision making within large financial institutions. Too much money chased too few genuinely good business investments and the money, desperate for ever higher returns, subsequently got poured into worthless dross. The writedowns to come will dwarf what has gone so far.

  10. mikestallard
    Posted July 9, 2008 at 6:39 pm | Permalink

    Taxation is excessive.
    That is why my son in law (in the oil business) is moving to Saudi.
    Here is what he is haggling over:
    1. Free Independent Schooling for his two children.
    2. A Health package for his family.
    3. A house in the non Muslim Quarter.
    4. A Company Car.

    On top of all this – which he can only dream about in Brown's Britain – he will live in a virtually tax free country.
    So what have we got that he won't have? Why can other countries do this when we cannot?

  11. PT
    Posted July 13, 2008 at 3:56 pm | Permalink

    "Doom monger after doom monger on al-beeb gleefully telling people how bad it is getting and how it will get worse.
    Again, if you were thinking about buying a house, would you? after all the doom mongers are saying prices will drop by a further twenty percent over the next year or so which means, if you buy a £300000 house today it will be only worth £240000 in a year or so"

    What a crock of sh*t. You think buyers are feeling doom and gloom at the prospect of buying a house for £60,000 less?

    And is the opposite of 'doom monger' an 'optimist'? Therefore a person in your warped little world hoping for a rise in the cost of living – in this instance housing – is optimistic. I guess this makes those hoping for cheap oil and food doom mongers in your backward thinking mind.

One Trackback

  • By Conspirama on July 8, 2008 at 3:28 pm

    Recession ahoy?…

    There were Wall Street analysts telling us the US was in recession at the beginning of the year. Instead, so far we have just had a sharp slowdown. There have been doomsters calling recession for the UK this year, but so far we have had ……

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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