Sunday, August 3, 2008

As Expected - The UK Economy is Collapsing

For the regular readers of this blog, they will be familiar with some of the predictions made in my essay 'A Funny View of Wealth', and some follow on posts that I have made in which I have discussed other aspects of the economic outlook. It is a while since I have looked at the 'big picture' so a brief review seems to be in order.

The first point to make is that, as predicted, house prices are not just falling but plummeting, and this was very much in line with predictions for this period in time. However, my prediction was, and remains, that they have a long, long way to go down still. In a later post I suggested that my already extremely gloomy predictions were too conservative, and I would suggest that my later more pessimistic outlook is more realistic. I do accept that there may be a very small upward blip at some point, a false recovery, but see the chances of this diminishing with time. However, there are still a few optimists out there, but I would suggest that such optimism is self-delusion.

Another element in the downward spiral that I predicted was that consumer confidence would evaporate, which is now the case, and that this would start to hit the service sector hard and fast. The knock on effect of this would be that many businesses would start laying off workers and that unemployment would start to rise. I mentioned the likelihood of the Central European workers going home or to other parts of Europe as the economy contracted and other labour markets in Europe were opened, and that this would ameliorate the rise in unemployment. As predicted unemployment is rising, the Central European workers are going home in large numbers, and unemployment is not rising as fast as would be expected in a sinking economy. However, also expect the rate of rise in unemployment to increase more quickly in the coming months. Whilst the return of immigrants can dampen the effects, it will not be enough to hold back the tide.

The predicted (and inevitable) rise in personal insolvencies is well under way, and will also accelerate with unemployment, with further stresses on finance caused by inflation in oil and food prices (both of which I did not predict!), as well as higher taxation. Expect a personal loan and credit card debt meltdown in the coming months. It has already commenced in the US, and the UK will soon follow. The banking sector is about to enter the second credit crisis, and banks such as Royal Bank of Scotland are already showing their vulnerability. Expect more runs on banks - Northern Rock was just round one, and round two will be even more ugly. The second round will see mortgage defaults rising with a sinking market providing negative equity, personal debt rapidly turning sour, and business insolvencies all hitting together. The banking system is toxic (spread your risk over several institutions, and make sure that you can move your money fast using online banking).

As expected business insolvency is rising, and as expected it is hitting the service sector first and hard (as well as house builders). Expect these numbers to now accelerate hard and fast, in particular pulling in the retail sector. The whole UK economy, as predicted, will be pulled down with the service sector and this is already taking place. The destruction of businesses is only just starting - prepare for much worse to come. If you are wondering where to put your money, keep out of retail, banking, and anything to do with leisure, excepting those companies that service home leisure. Solid exporters with unique technologies are the safest bets.

As for Sterling, I suggested that this would also start to fall, which it is doing (if you will excuse the metonymy), even against the US dollar, which has been tanking. I stick with my prediction that it has a long way to go yet. As confidence in the UK falls, it will fall off a cliff. I would suggest that there will be a steady decline for another couple of months, and then a steep drop.

As predicted the drop government receipts are making havoc with government finance, and this will get much worse as the economy sinks further. As I have predicted in a previous post, cap in hand to the IMF appears to the the likely scenario in the near future, though not for a while yet. I am really not sure that many people are aware yet of the Tsunami about to hit government finance, but it will be very ugly indeed. To misuse Alistair Darling's phrase, we are uniquely misplaced to weather the economic storm.

In other words, the UK economy is following the path that I predicted. As such, if I have been right before, I have to accept the uncomfortable idea that I will be right about the next phase of the collapse. This is not a pleasant idea. I am afraid the next phase is one of acceleration of the downturn, as each negative reinforces the others. The only remaining question is to ask at which point will other countries lose confidence in the UK economy? This is a matter of sentiment, of feeling, of intuition, of 'groupthink', and therefore hard to predict. It is when the sentiment goes that the banks will start failing, and the IMF becomes the saviour. I think that this is not far off, but am slightly less certain than in my previous predictions that this will be within 6 months. However, this is only a case of slightly less certain.

Not a happy post, and I have a feeling they will become ever more gloomy in the coming months.
Note: When I discussed the Chinese economy I suggested that China may be able to weather the world economic storm, but also suggested that China is on a knife edge on this subject. The early news is suggesting that China may not be that resilient. In my post I pointed to worries about their banking system and construction. It appears that these worries may have been well founded. See here for why. Having said this, I am still not confident to jump one way or another. China has many economic strengths, and may pull through this okay, although it will certainly feel negative effects of the global downturn.

At some time I may talk in detail about the US, if there is interest from readers on this subject.

1 comment:

  1. Hey,

    It's Anonymous again :)

    Well I'm definitely going to leave the UK next spring. I just need to figure out a place that will fare a bit better and will take me in.

    Maybe China or Japan as an English Teacher, or back home to Northern Europe?

    Off to work on my escape plan some more...


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