Saving the world
Mark Bathgate 3:56pm
Today’s revised GDP data confirms that the UK remained alone of the world’s major economies in recession in the third quarter of this year*. The fact that the UK remains mired in recession long after most economies have recovered makes clear how uniquely badly positioned the UK economy was to handle a downturn. While some investment banks continue to argue that this performance reflects the inability of the Office of National Statistics to calculate the data correctly, there is good reason to believe that this huge underperformance is grounded in reality. Economic history teaches that bank crises are amongst the worst things that can ever hit an economy. The collapse in credit availability and soaring bank margins have posed very substantial risks to economic growth. The collapse in tax revenues being reported in the monthly government budget updates does not herald a return to good economic health. The now regular collapse of retail chains indicates depressed high street spending. Business investment is suffering an unprecedented decline as credit for investment has largely dried up.
While Governments around the world have sought to help people through the recession by ensuring that interest rate cuts lead to lower mortgages, the UK has seen a stunning rise in bank margins. The data from the Bank of England shown above illustrates that banks have quadrupled their charges to customers for lending over the past 15 months. Costs for credit cards and overdrafts have risen by even greater amounts. With British consumers having around £1.5trillion in outstanding debt, this is sucking almost £50bn a year out of people’s pockets and high street spending. In contrast, mortgage rates in most of the rest of Europe are now below 2%, contributing greatly to economic recovery. The crisis in the British banks has largely shut down the ability of the Bank of England to influence the amount people need to pay each month in a mortgage. The huge amount of money the Bank is printing to fund Government spending is doing nothing to reduce bank margins or improve lending.
As the above chart from the Bank of England’s Inflation Report shows, the ability of businesses to invest has nosedived. As investment is clearly starting to recover in many economies round the world, it is likely that the severe reduction in lending availability caused by the bank crisis is one of the main factors behind the peculiar problems of the UK. The dive in the Pound should be giving British business a great chance to expand exports and market share – but the zombie banking system is preventing the flow of capital needed to raise production and boost investment needed to take advantage of this opportunity.
As the IMF continue to point out regularly the UK banking system has been hit far more severely than that of any other major economy. Soaring bank margins and declining credit show how serious the problem of the banks are for the UK economy. Rather than fix the banks, the Labour Party simply gave them the right to bill the taxpayer and mortgage holders for their losses around the world. It seems sadly inevitable that economic policy is going to be dictated by the need to maintain the political narrative that Gordon Brown “saved the world”, regardless of the cost. Whoever wins the election though will need to face up to the reality that the UK economy will be going nowhere until the problems of the banks are fully resolved.
* The figure for Canadian GDP is the consensus economic forecast rather than actual data, which is not released until next week.
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Short the UK
November 25th, 2009 4:14pm Report this commentGordon Brown chose the Japanese solution to our banking crisis, hence we have many zombie banks. He should have gone Swedish and had a good bank / bad bank, for RBS & HBoS. Allowing Lloyds to become a zombie was a huge mistake.
No doubt in the coming years Gordon Brown will have been shown to have made the wrong choices for British banks. Seems to be his narrative.
ssleddon
November 25th, 2009 4:18pm Report this commentAnother excellent report, Mark.
It's been an accepted narrative for months, that the Conservatives will have to sort this disaster out. Plus there's the suspicion that Brown is more interested in pursuing a scorched earth policy to heap misery on the incoming government. I wonder, given the recent rise in Brown's fortunes, what would happen if Labour were to win?
In fact, a Labour victory with a tiny majority may be better than an equivalent Tory one, as at least they'd be forced to try and clean up some of the their mess, whilst at all times being very vulnerable.
Sterence
November 25th, 2009 4:33pm Report this commentWhile the thrust of this article is right - we have as big a bank problem as Japan in the 1990s, and that is only just about sorted out now - the measure of bank margins is a bit misleading when interest rates have suddenly collapsed to all-time lows. Banks' branches are a fixed cost of operating a retail deposit network, so their loss of the gap between free borrowing from depositors and lending to the market at LIBOR explains why they need to put up margins elsewhere. None of this helps business or consumers but it is nonetheless inescapable.
Chris lancashire
November 25th, 2009 4:36pm Report this commentI agree with ssleddon - both an excellent analysis and the fact that a wafer thin Labour majority may be no bad thing. Brown and Darling are totally unequal to sorting this mess out and 12 months of them struggling would be enough to guarantee a proper Conservative majority. We could then tackle the country's problems properly.
TGF UKIP
November 25th, 2009 4:38pm Report this commentSplendid and many thanks again, Mark Bathgate.
However, fellow climate change "deniers" who want to some light relief should watch this brilliant musical video by Minnesotans for Climate Change. Entitled "Hide the Decline" it could well form the backdrop funeral music for the warmist headbangers. I saw it on the brilliant wattsupwiththat.com but the Youtube link is:
youtube.com/watch?v=nEiLgbE
Mike Brighton
November 25th, 2009 4:41pm Report this commentssleddon, I agree but consider for a moment the reaction of the bond and equity markets if a Labour election victory (however narrow) becomes possible. Our credit rating would be cut, the pound would collapse requiring central bank intervention with more borrowed money and both gilt buyers and investors would flee to the hills.
It's taken Labour 12 years from the 90's to noughties to return our economy back to the 70s
Kittler
November 25th, 2009 4:59pm Report this comment'Diving Pound = expanding exports'
What industry is there left that could produce the goods, whatever the rate of exchange.
Services like tourism and selling our assets to foreigners is easier work than to manufacture and trade.
Nick
November 25th, 2009 5:01pm Report this commentSort out the debts is going to take years. The banking debts are peanuts in comparison to the government debts.
I think we need a payroll tax, (perhaps called a labour tax) hypothecated to paying off the debt.
If people see hundreds, thousands of pounds going regularly from their pay to debt, and not to services, peoples' attitude will change
Nick
Michael Booth
November 25th, 2009 5:19pm Report this commentBut...but...Britain was 'best placed' to meet the global financial crisis. We were told so it must be true.
oldtimer
November 25th, 2009 5:31pm Report this commentThe last chart, of business investment to GDP, is alarming in two respects:
(1) how much worse the decline is this time vs the 1980s experience, and
(2) how much longer we will have to wait before any significant upturn can be expected - three years if there is a repeat of the past two recessions.
One question must be about how much industrial capacity will survive the recession this time around. In the early 1980s about one quarter of UK manufacturing capacity disappeared. It is a sobering thought.
This situation requires a government with a clear, powerful mandate to reform the tax system, and cut government spending. Hung Parliaments or Labour governments would be yet another disaster to pile on top of the ones we already have.
Naomi Muse
November 25th, 2009 6:08pm Report this commentThank you for this clear report.
When is Broon going to visit the palace and throw in the towel?
I think we should be told!
Mark Fulford
November 25th, 2009 6:19pm Report this comment"The dive in the Pound should be giving British business a great chance"
Britain's largest export market is the USA. Exporters were temporarily helped as the Pound slumped from a crippling 2$/£ to less than 1.5 That advantage is now being eroded as the Dollar slides even further. We're now back into 1.7 territory -- and rising.
Hysteria
November 25th, 2009 6:41pm Report this commentOldtimer - indeed - but what makes you think Dave will grasp the nettle?
oldtimer
November 25th, 2009 7:14pm Report this comment@Hysteria
No one knows, including Cameron. At one of his recent Cameron Direct meetings, he was asked how he wanted to be remembered. His reply "He didn`t screw up" or words to that effect. By that he meant sorting out the economic mess we are in and on which all else depends. Sounded like a good reply to me.
DZ
November 25th, 2009 7:41pm Report this commentIs the sale of Cadburys going to help? Are we completely mad?
RMH
November 26th, 2009 11:12am Report this commentAnd still we have people who will vote for him.
Seriously, they must be mental.
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