How much worse can it get?

By Associate Editor David Stevenson Jan 23, 2009

David Stevenson

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"Appalling, alarming and ghastly", is how David Page at Investec discussed the dire state of Britain's latest output numbers – and that was yesterday, before they were even published.

Today, Mr Page's worst fears were confirmed. And it turns out that the UK is even deeper in recession than the collective experts surveyed by Bloomberg had thought. They were expecting a 1.2% GDP drop in the final three months of last year, but actually our national output plunged a staggering 1.5% over the period following a 0.6% third quarter contraction.

To put that into context, it's the worst result since Margaret Thatcher's day, when 1980's second quarter saw a 1.8% slump leading to an overall shrinkage in the economy of 6%. In other words, the decline has already leapfrogged the 1990s recession, and is heading for... well, that, of course, is the big question.

Is this a repeat of 1929 to 1932? And if so, what does that mean?

Even those who were previously on the relatively optimistic side are having second thoughts. "Until recently we have felt this recession was as bad in scale and duration as the early 1990s, but not as bad as the early 1980s", says John Cridland at the CBI. "We've moved beyond that now". And NIESR director Martin Weale predicts this recession will be at least as nasty as the early 1980s, "and if you want to take a really gloomy view you could go back to the Great Depression".

Gloomy possibly, but maybe brutally realistic. This downturn is truly global – even more so than that of 80 years ago. It means there's no one left standing to pull up the world by its bootstraps. And the latest danger comes from the Far East, where the Chinese growth rate has slowed to its lowest in seven years.

"Demand is falling in China, they've over-invested in capacity and there's a global supply glut", says the new 'Dr Doom', New York University professor Nouriel Roubini who was in London yesterday. Societe Generale's Albert Edwards agrees: "Outright deflation has arrived and world trade is collapsing. China is now joining the rest of the world in the stinking cesspit of uncontrolled economic slump." That's why the fall in sterling isn't doing the trick in turning round our trade balance. Our international customers have run out of cash.

What does this mean on the streets of Britain?

We all know the retail industry is in trouble. Today's retail sales figures looked OK on the surface but carried an official health warning. There's bound to be more bad news there. And yesterday's repossession figures, up 92% on this time last year - meaning one family is losing its home every seven minutes – is another nasty sign of both the recent past and what's in store.

But "the real worry is unemployment, with the number of jobless set to rise to more than three million by the end of 2010", says Stephen Gifford at Grant Thornton. "It will certainly be a depressing year for many UK households". That will cost the already over-stretched public purse because it means ever higher welfare benefit payouts, and even more woe for house prices (and the taxes raised from them).

Yes, there's lots of government talk about how much of our taxpayer cash, as well as a mountain of borrowed money, will be splashed out on a mix of bailing out banks and public spending projects. And the Bank of England will probably cut interest rates further, while cranking up the printing presses to pump more money into the system.

The trouble is that takes many months, if not years, for these measures to have an effect. And unfortunately there's absolutely no guarantee they'll work. The risk is that we, and in particular our children, get saddled with well over £1 trillion of national debt without any real benefit to show for it – unless of course, so much new money is printed that we end up with inflation making a comeback in a few years time.

And the stock market? Edwards sees a 20% drop in global share prices this year. I wouldn't bet against him being right.

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Published in Economics | More articles by David Stevenson

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