First published in the Telegraph on 19 February 2009
Perhaps in the end it all comes down to the Great British psyche: the subconscious yearning to be the underdog, the knee-jerk reaction that prompts us to say “no” when we mean “yes”.
For whatever reason, from the earliest throes of this economic upheaval, we somehow talked ourselves into the belief that it would hit the UK harder than anyone else. We were wrong.
Even before the crisis was properly under way, you could detect the dull throb of resignation throughout the UK. Indeed, the statistics seemed to bear this out. We had the worst of all worlds – a bigger housing bubble than the United States; more consumer indebtedness than any other major developed economy; a government deficit that had scandalously yawned ever wider, even when the going was good.
In one fell swoop, the beating heart was torn out of the British economy: with the City done for, what hope was there for the rest of UK plc?
With British banks toppling like ninepins and house prices falling faster than they ever have, such suspicions seemed initially to be borne out by events. The silent implosion of what remained of British industry seemed to confirm all our worst fears.
So convincing were the arguments that even the world’s leading economic authorities were persuaded that Britain would suffer unduly following its years of excess. Only a few weeks ago, the International Monetary Fund warned that the UK would have the worst downturn of all the leading economies. We leapt on their conclusion with vigour: this, surely, was a stunning indictment of Labour’s stewardship of the economy over the past decade.
However, had we looked closer at the history of recessions, depressions and banking crises, we would have seen that Britain does not necessarily face the worst fate. Yes, times will be tough: tougher than for many years. Yes, many will lose their jobs, house prices will plunge further, and more companies will fold. All of this will be immensely miserable. But, just as in the 1930s, Britain may not bear the brunt of the depression.
To see why, don’t look at what is happening in London or Edinburgh, or even Wall Street or Frankfurt, but some miles out to sea. There, the shipping lanes that criss-cross the world – the arteries of commerce – are eerily quiet. Some time in November, while everyone’s attention was focused on the travails of Lehman Brothers, world trade was suffering a silent cardiac arrest.
Trade collapsed in a way it has never done before. The factories churning out the cars and televisions simply ran out of willing customers. And, just as financially reliant countries such as the UK and US suffer when the banks collapse, nations wholly reliant on trading experience one hell of a blow when the business implodes.
Germany, Japan and China can expect a difficult year ahead. It is the countries that have apparently been living virtuously, building up big trade surpluses as they pump out goods, that will be hardest hit. Britain’s dismal slump in economic output of six per cent in the final quarter of 2009 (in annualised terms) looks positively breezy in comparison to Germany’s 8.4 per cent slide and Japan’s 12.7 per cent descent.
Further afield, the chaos is even more intense. Although China’s official statistics claim it is still growing at a healthy snap, many economists suspect these numbers bear little resemblance to reality. Even the Middle Eastern economies are now coming under tremendous pressure. In Dubai, thousands of residents, fearful of being thrown into debtor’s prison, have simply upped sticks and fled the country without even taking their possessions. The airport car park is filled with abandoned cars.
Meanwhile, a second financial tsunami may be about to hit – one from which Britain is sheltered. It’s coming from the Eastern European economies, which represent a greater threat to the continent than subprime mortgages did to America. As they implode, they imperil the financial systems of Austria, Germany, Belgium and Sweden. So great are their problems that the German finance minister has now signalled his willingness, if things deteriorate still further, to bail out fellow euro members.
None of this misery should entitle Britons to much Schadenfreude; indeed, it will intensify our own recession. But we can at least afford ourselves a grim smile over the fact that this crisis is not ours alone. And we should thank the Lord that we stayed outside the euro. This is precisely the moment when free-floating independent currencies and interest rates come into their own. The nasty dose of medicine doled out to the patient is starting to work.
Alarming and discomforting as it is to see the Bank of England pledging to start the printing presses, or to watch the pound slide by more than a quarter, these are precisely the factors that will ensure Britain’s recession is less intense than that experienced by other countries. The only worry is that the freeze in world trade leads to a full-blown slide into protectionism, but that is a horror story for another day.