Friday, November 21, 2008

It's Grim up North (and East, South and West)

Remember when recessions mainly affected manufacturing in the north? (UK recession 1981)

A feature of the current recession is that it is affecting previously insulated sectors of the economy. Most notably, we are seeing record falls in consumer spending in both UK and US. For example, in the last US recession 2001, consumer spending never actually fell, but, now it is falling dramatically. In the UK, the sales slowdown has been somewhat mitigated by early pre-Christmas sales. But, with retail giants like Woolworths potentially being put on market for £1 [WSJ], these are going to be very tough times for retail. The impact of the recession on the financial service sector is well documented. Falling share prices will continue to put pressure on city jobs.

Global Slowdown Spreads East

India had hoped (expected) to avoid the global slowdown, but, to the unpleasant surprise of many politicians, India is feeling the squeeze as banks cut back on lending, the stock market falls 50% and consumer spending growth declines. This has caused India's growth rate to fall from 9% to 6.5%. This may still sound very attractive (compared to our negative growth), but with India's population growth and large increase in working population any slowdown in growth will cause unemployment to rise. (India's slowdown) China fears a similar fate.

Many Indian economists hope that the downturn will prove only temporary, but, there optimism may prove misplaced (as it has in other countries). In a global economy, the idea of 'decoupling' and insulation from economic downturns carries little weight.

There is an old saying 'When America sneezed the rest of the world catches a cold.'

Unfortunately, this still seems very true. Actually, it wasn't just even America sneezing. It was a seemingly small problem in the US subprime mortgages sector that has given the global economy something much more serious than just a cold.

No comments: