onsdag 2 april 2008

Is the economy past the worst?

New England development, originally uploaded by seadipper.

Some people, including most commentators, seem to be under the impression that the present difficulties, that began with Northern Rock, will soon be resolved and things will be on the up again.

I suggest not. The recession will go on for at least another two or three years and is set to get much worse before it starts to get better. House prices - in reality, land prices - have hugely overshot, due to the over-free lending policy which has allowed people to borrow far more than they can really afford, and in doing so fuel a boom which is nothing more than a bubble.

The tightening of lending conditions means, firstly, that houses new and old will be more difficult to sell. Then there will be a reduction in construction activity as the housebuilders cut down on new starts, and people will find it harder to get work. And because most refurbishment and re-furnishing occurs when houses have just been bought, there will be a further decline in the construction industry due to the reduced volume of house sales, and the retail furnishing industry will be hit too. I would not like to put a figure on the likely number of unemployed, but it will be large. There are also the large-scale layoffs in the financial services industry to consider; although the numbers affected are relatively small, a lot of purchasing power will disappear - this affecting the luxury end of the market - expensive restaurants and the like. The only counter-effect will be an increase in construction of home extensions and the like due to people deciding to stay put.

This misery is unavoidable, but governments and bankers seem to think they can avoid it by making money freely available. But its main effects will be to defer the collapse and to spread the misery to the thrifty and prudent, who will find the value of their savings eroded by inflation, which will probably be as bad as that in the 1970s.

One factor which will make the forthcoming recession particularly difficult, and recovery particularly slow, are the growing shortages of food and commodities, especially energy.

There are no grounds for optimism about the economy. However, this does not mean that nobody will do well out of the changed conditions. There should be opportunities for British exporters, although because the European central bankers are also making money available, the value of the Euro, in terms of goods and services, is likely to follow the pound on its way down.

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