Government minister admits UK in worst recession in 100 years

10th February 2009
By IB Staff Writer

Gordon Brown's former economic adviser, Ed Balls, has effectively repeated comments made by the Bank of England's deputy governor last October by asserting that the economy is experiencing the worst recession in over a century. While the government may downplay the sentiment, there's no avoiding this reality: unemployment and inflation will ensure a long and painful recovery for the UK.

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The current global recession is "the most serious for over 100 years", Gordon Brown's former economic adviser has declared while speaking at a Labour conference. This is not the first suggestion of the dreaded D-word; last October, Bank of England deputy governor Charlie Bean said: "This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history."

Scaremongering and political posturing aside, there is every reason to think that the UK, along with most of the world, is indeed in the midst of an economic depression. This is, of course, the consequence of the US sub-prime crisis, compounded by Lehman's collapse and the subsequent crisis of confidence among banks. It is now being fed by the decline in consumer and business spending, which will result in economic conditions in the UK that will push a recovery back by at least two years.

First, Datamonitor forecasts that unemployment in the country will approach 10% by the end of 2009. The number of companies that are closing divisions and declaring bankruptcy will rise in frequency and magnitude in 2009, and continue to do so into 2010. Financial services players and ancillary businesses such as law firms, accountancies and consultancies still have a substantial number of jobs to shed. Consumer and industrial firms will significantly cut jobs as the ramifications of the staff reductions in 2008 are increasingly felt by the consumer markets. As more positions are terminated, consumers will feel increasingly unwilling to spend. This will further depress companies' revenues and force more job cuts.

Second, deflation will give way to inflation. The government's efforts at quantitative easing will combine with rising oil costs (as the Organization of Petroleum Exporting Countries restricts output to boost its own economies, which are also facing challenges) to drive up prices. This will result in an inflationary environment, forcing the government to increase interest rates to control it. Higher interest rates will further dampen house prices as funding costs cause would-be purchasers to look at other asset classes for investment opportunities. Higher interest rates will also restrict companies' ability to borrow, causing additional cuts in output and jobs.

These conditions will lead to a large-scale contraction in important areas of the retail savings and investments market. Retail investors have seen nearly 10% of their total portfolio values wiped out in 2008 (excluding life and pensions, and non-liquid assets such as direct investments in real estate), with further declines on the way in 2009. Unit trusts, equities and bonds all suffered severely, losing between 30% and 37% of their value over the previous year. These investment categories are set for declines of between 15% and 20% during 2009. Given the impact that this loss of financial security has had and will have on the UK population, combined with rising unemployment and inflation, it will be a few years before the country sees "green shoots" again.
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