The Economy, an Alternative View
Let’s go back to the summer of 2007. Remember that, when the economy was growing nicely?
But at that time, there were several things underneath the surface that were of serious concern to economists and commentators. These problems included:
- Excessive borrowing by consumers and by banks
- Consumers were getting 125 per cent mortgages and borrowing way over their ability to pay
- House prices were growing unsustainably fast
- First time buyers were being priced out of the market
- Imports were too high and exports too low leading to a huge balance of trade deficit
- Interest rates were comparatively high at 5.75 per cent
These were big underlying problems and the UK media was very concerned about them and claimed that they had to be addressed urgently.
So great news recently then. The banks are pulling back from borrowing excessively and beginning to restore their balance sheets. Consumers are having to rein in their borrowing and who knows they may even start to save a little more over time. Sterling has dropped against the euro and a range of other currencies so our exports should increase. House prices are ceasing to rise which should prevent what could otherwise been a major crash and in the long term this will mean that first time buyers (those with good deposits at least) will not be priced off the housing ladder. And interest rates are down.
So have the media remembered to say that a lot of the problems they were worried about nine months ago have begun to improve?
Errr, no.
Undeniably, there are choppy waters ahead. There is pain in the housing market, in the property sector and in retail. Interbank lending rates remain high which feed into higher mortgage payments which reduce disposable income. Inflation, food, energy and oil prices remain stubbornly high. And the US economy may suffer a short recession followed by a period of low growth.
But it is important to remember in all the doom and gloom that UK economy is due to rebalance, which will be better for the long term. There will be short term pain with an economic slowdown. But the UK economy should grow by 1.6 per cent in 2008, and by a similar amount or more in 2009 which, while not great, is not a disaster.