First published in the Telegraph on 11 October 2007
We Britons tend to import stuff. It won’t have escaped your notice that the vast majority of things you buy in the shops these days – whether it’s trinkets, televisions or toys – comes from foreign climes.
To this long list, we can now add economic crises, if Alistair Darling is to be believed. In his Pre-Budget Report, the Chancellor blamed America’s financial woes for the slowdown facing Britain next year. The chaos that culminated in the Northern Rock crisis – the first run on a major British bank for more than 140 years – now threatens to leave a major dent in the wider economy.
He didn’t dwell too much on it in his speech, of course, but the Treasury’s documents leave you in no doubt that the outlook is poor. It’s not merely that economic growth will be slower than previously thought. Growth of two per cent rather than three per cent is no disaster: we grew by just under two per cent as recently as 2005. The point is that, this time, pain will be felt not by businesses but by households, whose finances are looking far more unhealthy than two years ago.
This means higher unemployment, higher mortgage bills, and more and more families giving in to insolvency. It means years – not months – of belt-tightening as we pay back debts built up over a decade of easy living and easy spending. It means that house prices will fall – probably by only a small amount, but perhaps by a lot.
If it sounds like a consumer slump, the likes of which we have seen in Britain again and again in past decades, that’s because it is.
It is disingenuous, to say the least, for the Chancellor to blame nasty foreigners for our plight. When the going gets tough next year, it will be an excuse that won’t stand up to scrutiny. He’s right that the sophistication of financial markets means that economic incidents on one side of the world can cause a dramatic and almost instant reaction on the other. The trigger for our impending economic slowdown did stem from events in America, where the crumbling housing market has caused a slew of defaults by the poorest home-owners.
In a frighteningly fast chain-reaction, the banks and investors around the world who financed these mortgages found themselves facing major losses. They stopped lending so freely to each other, and in particular stopped lending at all to the dodgiest banks. Step forward Northern Rock, which of all the European banks was probably most exposed, since its overriding philosophy was to borrow to lend.
Meanwhile, home-owners around the country are squeezed because the money market freeze is forcing almost all the other mortgage lenders to raise their rates in order to stay afloat.
But this is where the excuse breaks down. For just as Northern Rock was the most vulnerable of all banks to higher borrowing costs, we Britons are more exposed to them than almost any other nation in the world – and this is in large part the result of government policies. The Treasury has done nothing to prevent us becoming the most indebted major Western economy; nor has it done anything to mitigate our reliance on the financial system – and the performance of the City – for our economic wellbeing.
Neither can it absolve itself from the blame for the Northern Rock situation. Although the bank was clearly struggling, it is only suffering such an ignominious end because of the Government’s and authorities’ actions – or inactions. The run was caused not by these economic problems, but by a combination of incompetence by the regulators and an archaic legal system that does next to nothing to safeguard savers’ funds when banks go belly-up.
Like it or lump it, the Government is directly responsible for the economic pain facing the nation. And I’m afraid there will be pain. The rapid and inexorable rise in house prices over the past decade is one of the main reasons for our prosperity. We have not experienced an annual fall in house prices since the mid-1990s, but, with the market already turning, there will probably be one next year.
The number of repossessions is rising rapidly; this will accelerate even further in the coming months. Many of the biggest losers will be poorer families and first-time buyers, who have taken out unaffordable mortgages to get on the property ladder.
Some people will do well out of the situation, buying property at a knock-down price; others are already tightening their belts and stopping spending so much on their credit cards. For there’s no guarantee that the economy won’t slow by far more than the Chancellor has predicted.
And paradoxically, just as the financial chain-reaction meant we swiftly felt the effects of America’s housing market slump, the pain we feel in the coming year will be sliced and diced and exported to markets all around the world. Perhaps this is some small consolation.
Yes, it’s Schadenfreude, but when times are tough, these little things help.