UK recession How bad will it be?

Disclaimer: I am not an economist so whatever I write is liable to be wrong, very wrong.

We all know that the economic situation in the UK is pretty dire: but official figures are starting to show how really awful it is.

The crunch time will probably come in late January / early February. At the moment, we have Christmas and the New Year to divert us, but come January, there won’t be a thing or a date that we (can) look forward to. Fewer people have any reason to shop and more businesses will fold, making more people unemployed. If it’s a cold winter, as predicted in some quarters, then fuel bills will start arriving and bite into people’s finances. Oil prices have come down a lot but I haven’t seen too much hurry among the energy suppliers to cut down on the retail price. In my not-so-sophisticated way of seeing things, people will be running out of money soon. There is no way of begging or borrowing from the (part-)nationalized banks either, even if collectively the tax-payers own the banks.

Banks are damned whatever they do. The assets are decreasing in value everywhere and they need to shore up their own financial positions. The last thing they want to do is to lend their precious money to people who may not be in a position to repay, and that will include a number of individuals and businesses who would be able to do so but are adjudged too risky. But if they don’t lend, more and more of their assets, the loans, will turn bad. And there is no easy cure for it. Establishing a ‘state’ bank for individuals and small businesses won’t work. The Prefecture of Tokyo tried that, with a disastrous result. Politicians usually do not make good bankers. Bankers cannot make sound decisions if they have to achieve certain political goals, such as lending a certain amount of money, since that will skew the risk assessment.

The widening trade deficit shows that Britain cannot export its way out of recession by making the currency cheap, because Britain does not manufacture things that others want. [See also UK economy What does Britain export?] Neither can Britain spend its way out of recession: the efficacy of VAT cuts and other measures to stimulate the economy by consumption is doubtful. [See UK in recession Cutting VAT] Britain’s economy and credit (as in others’ faith in the country) are not sufficiently large to borrow its way out of recession. The UK state has borrowed a lot of money already, and it probably will not have the capacity to borrow to fund vast pulic expenditure. Mr Obama’s America can, but not Britain.

Britain has had a lop-sided economy for a while. Without the size that America has, or a more balanced economy that Germany for example has, there isn’t much Britain on its own can do. The UK won’t be Iceland, touch wood, but it’s going to be pretty grim for the medium-term and Britain will have to wait for the world economy to pick up since it cannot pick itself up.