Trying to find anything to be confident about with regards to our economy is extremely difficult at present. Earlier this week, we saw the American’s being full of confidence and optimism for the future as they heralded in their 44th President Barack Obama. We are constantly bombarded with information by the media. Today the media have released figures showing that we have a 1.5% contraction in our gross domestic product (GDP). This means that if we looked at the UK being a company or a household then we would see that we are making less and producing less than last year. This suggests that our economy is shrinking at around 6% per year and all sectors of our economy are affected by large falls in output. The pace at which our economy is shrinking was last witnessed three decades ago.
For recovery to happen we need a global recovery that is lead by the United States. The US have a significant fiscal stimulus on the way with very low interest rates and the policy levers are in place to try and nurture this recovery. But we are still a long way away from the resumption of any growth and recovery at this moment. A lot is expected of Barack Obama, the newly elected president of the United States. He is seen as the saviour of the free world economy by a rainbow of nations around the world. Barack Obama has put forward a staggering and eye watering package of $850billion to create new jobs, refinance ailing banks and lead them to the Promised Land. This will certainly add to their multi-trillion dollar debt they already have. What a challenge this newly appointed rookie president has!
There are a lot of forecasters predicting how deep this recession is going to get for the UK. It seems that the European Commission are warning that we in Britain are going to have an ‘economic shock’ not seen since world war two. This recession is likely to be similar to the 1980’s recession which lasted for two years.
Other pundits believe that we have seen dole queues lengthen, industrial production fall, retail contract despite heavy discounting and its likely to get a lot worse before it gets better. Whilst a 1.5% drop in GDP might seem bad today; these pundits believe that you need to hold on to your seat as things are still expected to get a lot worse before the end of next year. They feel we could still see up to 2.5% contraction in our GDP and unemployment will continue to rise to 3.1 million people by the end of 2010, if the pundits are to be believed.
Recessions cost an enormous amount of money and many countries don’t believe that they can afford to borrow a lot of money to spend their way out of a recession. If you fail to prevent a really long recession; then it will end up costing more in unemployment and in a reduction of tax revenues received by the government. It is a balancing act for any government when they know that they don’t want to borrow more but they don’t want a long recession. It might be wiser for a government to borrow more now and have a shorter recession by spending money to create jobs and support the banking industry.
The governments’ money is being used by the banks at the moment to avoid engaging in aggressive restructuring that is desperately needed. The banks are haemorrhaging money, billions and billions have been lost over the last three months. Banks around the world have reported losses, like Merrill Lynch lost £50 billion, Citi Group lost £8 billion, and the Royal Bank of Scotland is due to post losses of £28 billion from it take over of ABN Bank and its losses in the US subprime market. Currently all these banks are doing at present is just buying time at the moment. If the banking sector doesn’t significantly restructure itself soon then they will just continue bleeding money. This is grime news!
There no chance of this recession ending until the housing market has bottomed out and the financial sector has completed the really serious restructuring that is required for it to be restored to profitability. It is thought that house prices will continue to decline through the remainder of this year and probably at the same rate next year. So whilst confidence is the key to recovery from this recession we will all need to remain upbeat and focused on improving our economy. We should all be involved in this recovery and work together.
Affirmative action required
We need our government to stop responding to situations as they occur. We do not need a government that continually fire fights the situations as they happen. They should stop now and start taking decisions to prevent situations happening – they need to be pro-active. Its time for the government to nationalise the Royal Bank of Scotland and the Lloyds TSB Banking Group and provide the funds to kick start our banking system to start them lending again and to lead the other banks. The government has already reversed their original decision with the nationalised Northern Rock Bank. They instructed them to start lending to new borrowers and allow their existing customers to remortgage to new mortgage deals without having to move lenders. This is leadership in action!