Tuesday, September 2, 2008

Whose Fault is the Recession?

The Chancellor of the Exchequer, Alistair Darling, recently said that the UK economy was facing its worst period for 60 years. I don't agree with this assertion; and am surprised a senior minister wants to exaggerate the weakness of the economy. But, nevertheless the economy is doing badly, and the UK's proud record of 63 consecutive quarters of economic growth is finally coming to an end. What has caused this downturn and who, if anyone, is to blame?

The Credit Crunch

Undoubtedly, the unexpected freezing of credit markets has played a critical role in reducing consumer spending. The freezing of credit markets hit the UK mortgage and Housing market very badly and this has caused a contraction in consumer spending. To a large extent, the UK government can claim that this was an issue beyond their control. After all, the UK government can hardly be held responsible for bad lending and defaults in the US subprime mortgage sector. However, the UK, is far from blameless. On a lesser scale, UK banks have made a series of bad lending decisions, typified by the business plan of Northern Rock which led to the necessity of a government guarantee. Like the US, the UK has trusted too much in the self regulation of the banking system and has not done enough to ensure checks and balances in the banking system.
(see: who is to blame for credit crunch)

Cost Push Inflation

Consumer spending has also been squeezed by rising prices. The UK government can claim that the cost push inflation, is a global phenomena beyond their control. Rising oil, food and energy prices have pushed RPI inflation up towards 5%. However, this inflation is not really of the government's making. There is little that the government or Bank of England could have done to avoid this. This contrasts with the last spike in inflation (see: The Lawson Boom) - in the early 1990s when the economy was allowed to expand too quickly.

Mistakes of the Government

  1. Debt Levels. In the past few years, the Government have increased national debt as a % of GDP due to higher government spending. The high levels of national debt now leaves the government with little room for manoeuvre.
  2. Unbalanced economy . Economic growth was maintained mainly by high consumer spending, low savings and rising house prices. Personal debt rose to record levels. UK manufacturing has been relatively weak, leaving a persistent current account deficit.
  3. Rhetoric. The government were keen to paint a rosy picture during periods of growth. Their persistent self congratulatory rhetoric, was not entirely undeserved, but, it did make them complacent about longer term problems such as debt levels, manufacturing and productivity growth. Now that the economy is slowing down, it hardly helps to exaggerate their own problems saying it is worse in 60 years.
The Impact of a Recession

1 comment:

Timothy said...

N.B. "...finally coming to an end."

Really? Finally? Check the attitude: When will human population growth "finally" come to an end?

With an attitude like that, we could put this person in charge of reducing the "surplus population."