For the first time in 15 years, I am seriously worried about the outlook for
the British economy, the housing market and sterling. For almost the whole
of the period since 1992, when British economic policy was liberated on
Black Wednesday, I have been at the optimistic extreme of economic opinion
in Britain. Today, however, I find myself at the opposite end. Most
economists are predicting nothing worse than a modest slowdown for the
British economy next year and are laughing off the IMF’s suggestion that
house prices here could fall more steeply than they have in America. But to
me it appears that all the risks in the year ahead - to economic activity,
employment, house prices and sterling – are now clearly on the downside. To
explain why I have turned so bearish, let me borrow the technique of Donald
Rumsfeld: I will start with the obvious risks, move on to the “known
unknowns” and finally to the “unknown unknowns”.
Starting with the known problems, there are essentially three, corresponding
with the three main driving forces of British economic growth in the past
decade. These have been financial activity, public sector spending and
housing. The first two forces clearly will be much weaker in the year ahead
than they have been for most of the past decade. Public sector employment
has already stopped growing and will be squeezed much more tightly in the
next few years. Wholesale finance and business services, which are more
important to Britain than to any other major economy, are bound to
experience a serious setback after the recent credit crisis.
With public sector employment and financial incomes stagnating and the
wholesale mortgage markets semi-paralysed, the property boom of the past two
years must – surely – be over. The only question is whether the next phase
of the housing cycle will be a long period of stable prices, which is what
most British economists are still predicting, or whether the boom will be
followed by a bust, like the one in America, as suggested in an IMF report
published in Washington last week. The IMF report did not predict a crash in
British housing, but merely pointed out a simple statistical fact often
mentioned on this page: house prices in Britain, along with many other
European countries, have risen much faster in the past decade than US house
prices and the difference in house price inflation cannot be explained by
relative movements in incomes, population or interest rates.
The fact that house prices in Britain and in several other European countries
(see chart) have risen 40 per cent more than the IMF can explain on the
basis of such fundamental factors does not mean that they are likely to fall
by this amount. But the IMF figures do show that Britain (along with
Ireland, Spain, France, Denmark and many other European countries) is
potentially even more vulnerable than America to a property shakeout if the
forces stimulating housing demand ever run out of steam. And that is what is
happening now, as the simultaneous slowdown in financial and public sector
employment combines with the sudden loss of liquidity in the mortgage
markets and the vertiginous levels already reached by house prices and
mortgage borrowing.
Until recently I would, nevertheless, have joined the moderate majority of
commentators in suggesting that the British housing market could enjoy a
relatively soft landing, because of the strong underlying demand for
housing, especially in London. That demand was, in turn, due mainly to
London’s position as the world’s financial capital. In the past few months,
however, this calculation has abruptly changed and this is where we come to
Rumsfeld’s “known unknowns”.
Nobody knows how much the process of global financial liberalisation will
suffer as a result of the summer credit crunch, but there is certain to be
less growth in wholesale financial services than there was in the past two
years. It is even harder to say whether the mismanagement of the Northern
Rock crisis will damage London’s standing relative to other financial
centres, but it is not going to help. Most unpredictable of all is the
impact of Gordon Brown’s unexpected tax changes on London’s position as the
unchallenged centre of global finance.
The post-Budget controversy over inheritance tax and capital gains tax reform,
has overlooked the even more radical changes in the tax treatment of
foreigners living in Britain. Anecdotally, there is already evidence of
hedge funds, banks and international businesses moving some of their highly
paid international staff out of London to Geneva, Monte Carlo and the
Channel Islands. Of course, these tax havens will never replace London as
the financial centre of Europe, but at the margin they are now likely to
divert more of the international incomes and employment that would otherwise
have come to Britain.
As a result, the London economy is likely to suffer much more than the rest of
the British economy in the impending slowdown – and this will be
particularly true of the top end of the London housing market, whereI
foreigners have accounted for more than 50 per cent of the buyers in the
past few years.
Indeed, the evidence of a sharp turnaround in the London property market has
already started to appear in unofficial figures, such as the monthly surveys
published by Primelocation.com, the high-end property website, which has
reported two consecutive months of falling prices in London and an increase
of 32 per cent in the number of properties for sale. To make matters worse,
the preBudget change in capital gains tax could well encourage buy-to-let
landlords to put their properties on the market from next April onwards to
take advantage of the big tax reductions that many expect to be reversed in
future budgets. This will put further downward pressure on property prices
next year – another “known unknown”, suddenly introduced by an abrupt change
in economic policy that nobody could have predicted even a few weeks ago.
Which brings me finally to the “unknown unknowns”, which have suddenly made
the economic outlook for Britain even more uncertain, but also more
alarming. All of the policy U-turns of the past few weeks, the random and
uncoordinated tax reforms, the loss of confidence in the Bank of England
resulting from the Northern Rock crisis and the signs of panic in the
Government in response to Tory gains in the opinion polls raise serious
questions about the sustainability of the economic framework that has kept
Britain so prosperous and stable since 1997.
Suppose a panic-stricken Prime Minister appoints a political crony as governor
of the Bank of England. Suppose that public sector unions, sensing the
Government’s weakness, refuse to accept the cutbacks in public spending that
the Treasury has planned. Suppose the recent tax reforms blow up in the
Government’s face and end up yielding less revenue than expected.
After the events of the past few weeks, it is easy to imagine such “unknown
unknowns” – and all of them spell bad news.
Well we've know about this for years! Its old news, those who saw the warning signs back in the late 90s and again in 2003, all bought into GOLD!
What a pitty Gordy sold half our gold reserves off at the bottom of the Gold bear, and what a signal to the savvy investors!
Welcome to what may become the biggest financial disaster in history.
Stephen Fraser, East Ham, London
Of course the Economy is on the slide and it's no surprise at all.
For the last 10 years cheap credit has seen a huge increase in consumer spending and consumer debt and THAT has kept Britain's economy afloat.
Raise interest rates and the "cheap credit bubble Economy" collapses.
Joe McT, Glasgow,
The situation is hardly surprising when our industrial and manufacturing base has continued to disappear to China and India and to parts of Eastern Europe and also call centre jobs being outsourced or exported to India and to be replaced by what? Immigration has continued apace in the last decade and whilst the government might trumpet that migrants have put £6 billion per annum into the UK economy other figures suggest that their increasing use of public services, the NHS and medical services, education and schools, social housing, social security and the provision of multi-translation services are in fact costing £8.8 billion per annum. The iniquitous Council Tax has doubled in a decade and their is a threat of more increases to pay for immigrant services; the cost of utility services especially gas and electricity continue to increase; the cost of foodstuffs continue to increase; and the cost of petrol and fuel oils also increase. How does one manage on a fixed or low income?
Kenneth Armitage, Suffolk, England
Well, well, well - looks like the end of 'the-end-of-boom-and-bust'. The cyclical nature of capitalism is reasserting itself (with a vengeance) and even Anton has finally cottoned on to what is an open secret (among non-economists that is): viz, you cannot live on tick forever. Actually my old mum could have told him that! Anglo-Saxon new economic paradigm?Yeah, right. Talk about schadenfreude; I'm loving it.
How about Teddy Bears Picnic for top of the pops!
F.V.Lee, London, UK
It is a measure of the strength of the economy that the Labour government inherited in 1997 that it has taken much longer than usual for them to screw it up.
Martin Evans, Newmarket, Suffolk
The problem for the man in the street is that over the last few years his income has not increased whilst all his outgoings have.These are things he has to pay for-Council Tax,Utilities(Gas,Electricity,Telephone)parking,petrol,mortgage etc,and this is not going to stop.Council tax is going to go up again as Darling is giving the Councils less government funding(or they cut back).Petrol is going up as the price per barrel is atr an all time high,plus government tax is going up on it.Food prices are on the rise(just look at how bread prices have risen.
The only thing the man on the street can do now is cut back his spending,he has borrowed as much as he can and has reached his limit.
The days of bounty are coming to an end,so Browns boast of ending the times of" Boom and Bust" will be found out and we will suffer for it.
Nigel Wheatcroft, Wimbledon, UK
If my memory serves me rightly, one of the reasons for not adopting the Euro in the UK was that the Pound was too strong. So maybe now the powers that be might find a warm word for what is arguably the strongest currency, i.e. the Euro. The image of the Queen would be on all the coins, so she would get much wider coverage than in Sterling. And it might be a move to lessen the zenophobia about Europe that is still rife in the UK. We are all in this together, Brits included.
fay, Hagen, Germany
"Nobody knows how much the process of global financial liberalisation will suffer as a result of the summer credit crunch"
Neither do they know IF it will suffer.
John, Notting Hill,
Not only do I agree with your article, I'd go much further on the Dooms Day scale of things! I for one, have never really understood just how damaging this Government has been until recently. Yes I knew things were dire and yes I'd long since felt that the pooh was going to hit the fan big time...but somehow I thought Labour would pull something out of the hat to avoid it. But no, they haven't got a clue.
Government spending has exploded and so has private debt. The banks are only now waking up to just how exposed they really are. But even this is only the warmup act. Unemployment is going to through the roof! And who will be the largest group amongst them...immigrants! Lots of lovely unemployed generating not 1p of tax income to cover their costs!
So yes, the UK is in for the most agressive fisting session it's ever had! Talk of riots on the streets; I really do feel that Parliament will burn...as will our political way of governance!
It's Game On time...time for MP's to run!
David Downes, Chester, UK
Looking at the longer term, there are a couple of inescapable observations: over the last 25-odd years western economies have been assert stripped by their rich elites, moving the majority of real wealth-production offshore, first to Japan, then more recently to China and elsewhere; this process has been hidden by the tool of increasing consumer and housing debt, being the only way to maintain purchasing power and hence political acceptance in the west. In the west we now see grossly over-valued house prices and accompanying equity withdrawal, historically high levels of mean household debt, and an huge increase in the wealth of the richest 5% of the population. This process will continue until there is a collapse of western lenders' confidence in the quality of debt on their books. We are now nearing that point. A similar process, albeit different in the details, occurred in the 1910s-20s and led to the '30s slump and WW2. Comments, Anatoly?
Anthony Jackson, Oxford,
Take an overgrown rose bush... a good gardener will prune or cut back this rose bush to it's strongest form, it's stem. Knowledge is power. This gardener's knowledge is safe as he knows that the rose bush will grow again, stronger and more prosperous than before. This simple knowledge and growth can be applied to the financial markets or everything that requires growth. There is no such thing as a 'crash' this word alone induces fear and worry into the minds of the financially unintelligent. A market correction is a more accurate phrase. With the fact that knowledge is power and a lack of 'financial intelligence' (FI) in the average person in the UK, perhaps the schooling system should be facilitating the 'Laws of Growth' and 'FI' to the youth of this generation - not the next. 'FI' - its not how much you make, but how much you keep, how hard it works for you and how many generations you keep it for. I find the financial and housing markets exciting, i don't blame the government.
Neil, North London, UK
As stated here before, the CGT changes might have been made in order to get more housing supply to the market-just be careful what you're wishing for....
You seem to be one of the few who can remember how London was before, in the mid 90's, the west european immigrants fled their high tax countries and brought their employment income and culture(e.g. power showers...) with them and what place it could easily become again. To all the non believers I'll say that everyone concerned, e.g. worth less than a few million £ and working in easily transferable high (tax) paying (city) jobs is actively considering their options as the non-dom legislation is regarded as unfair and unattractive to them(not to the billionaires-they laugh their socks off).
Also,take it as known known that Italian,Swiss, Luxembourg and Portuguese taxes are now lower than in the UK, and that Germans,Austrians,Dutch and Belgians face much lower CGT on longterm investments. Oh, and there is still Ireland for us....
George, London,
Having read and absorbed another excellent article by Anatole, I have drawn the following conclusion: lots of property investors are going to be miserable, but average Joes still won't be able to afford a bloody house.
Jonathan, Herts, UK
"....maybe London can stop subsidising the rest of the country too.."
Phil, I hope you pay your own £16 billion for yuour own Crossrail...
Pete Balchin, Solicitor , Bristol, UK
You write as if the "credit crunch" came as a "black swan". A bolt from the blue that could not have been predicted and that this event will be the cause of something down the road. In fact of course the bust is endogenous to the boom and was always inevitable. The false and unproductive investments given rise to by the government created boom had to be recognised eventually. Now they are being recognised and the bill must be paid. Your sudden conversion to reality would have more credibility if you had pointed out these risks BEFORE the market recognition occurred. Why should your readers listen to you when you completely failed to see any problem on the horizon until after it smacked you in the face.
Peter , Wright, San Francisco
It's been a long time coming but the wheels are finally coming off the phony Anglo Saxon debt fuelled booms. All the phony mechanisms that held it in place, high and rapidly growing public sector expenditure. an out of control credit and housing boom. tax advantages for finance and non doms are going into reverse.
Look for a return to the 1970s, stagflation, real reductions in house prices of 20-25 percent. winters of discontent. incompetent Labour governments. more wars and a shift of global power to the Middle and Far East.
Have your kids learn Mandarin!
oldasiahand, Guildford, UK
"Don't forget that a falling sterling, should it happen, will be welcome for some, namely exporters."
Dave, London, UK
That would be true if we still made anything to export, as it is all we do is sell each other coffee, insurance, gym membership, and loans we cant afford to buy overpriced houses.
paul, Bletchley, Bucks
I totally agree with Roderick, well said.
Tristen O'Driscoll, Birmingham,
I everyone is missing a key and fundament issue here. Oil has quadrupiled in price in the last four years. This simple commodity underpins all growth for businesses and industry.
Over the next few years we will see the price rising further and heavily influencing inflation (although i suspect a few tax cuts on gasoline will occur) and this will in turn affect every industry and business.
I am not trying to herald doom by the way, but every economist i know is aware and concerned of this fact but never mentions it in there forecasts and predictions.
Eamonn Finn, Belfast,
hurrah! I will be able to afford to move back to my home country after all!
Anna, Melbourne, Australia
I think you are right, but then again, I've been expecting a downturn in the UK property market for a number of years, and I have been wrong. But I think the factors you identify in the broader economy will have the suggested knock-on effect. What always surprises me as someone who no longer lives in Britain, is how very very expensive everything is, especially and including housing. At some stage there is no value in a price, and I think you've long reached that point.
samtam, Bangkok, Thailand
Thinking about it, the special factors *behind* the bust in American housing (see note below) are probably part of the *cause* in the bubble in British, Spanish &tc. housing.
Liquidity has to go somewhere, and (at least until now) there's been a lot of it about. Maybe as much as the IMF's 40% unexplained?
Mary Cunningham, London, UK
To Dave of London
Thanks for pointing out that devalued sterling helps our exporters. This is a non argument. How many of these exporters do you think use imported commodities and components? A small minority of expoters will benefit from devalued sterling, most will suffer.
The UK economy is a house of cards. There is no shortage of supply of housing, just an oversupply of credit. The only option for the politicians to "protect" themselves is to print money; they can then blame the mess on imported inflation.
A generation of savers will see there hard work devalued in a short few years. Buy asian currencies, buy gold, and get ready for the storm.
Paul Jones, London,
"No return to boom and bust" said Brown whilst chancellor, but now a bust seems to be the very thing worrying your commentator.
Admittedly, some of these more worrying recent tax changes happened on Darling's watch, but the countries preparedness for a downturn is Brown's responsibility.
Years of waste and squander have left us more vulnerable in a downturn than we should be, after so many good years. I wonder now if your commentator still rates Brown so highly?
Colin, Edinburgh,
Agree with John. non-dom tax treatment has been a tremendous incentive for foreigners to live in the UK (London).
I wouldn't be surprised to see businesses (particularly financial services) relocate to France where the government has introdduced a maximum tax liablity of 50% for individuals and property is much more reasonable than London.
The new French Finance Minister has already spoken about making Paris more competitive than London as a place to do business. Plus the restaurants and cafés are pleasant and unpretentious and you can be on the coast in the sun within a matter of 3 or 4 hours. Good roads, excellent public transport and a Mayor of Paris who does things for Parisians without heaping on extra taxes. The writing is on the cards.
Alan, Paris, France
Income tax on the working poor: up. Tax on the non-doms: up. National Insurance: up. Car taxes: up. Council Tax: up. All other taxes: up.
Incomes: static.
The present small surge in spending is a dead man's bounce. My own anecdotal evidence is that ordinary, poor, working people are worried sick, and in some cases losing their jobs. I know two poor people who have their houses on the market, with zero interest. I have myself just bought a new computer and printer, because my ancient ones broke down irreparably. I had to dig into savings, so I sincerely hope the finance gurus don't believe I am some kind of happy consumer and misinterpret my decision making as anything other than unfortunate and essential.
Finally, last year a friend of mine with a very significant job in the city sold his one million plus pound house and moved into rented.
So, from my personal perspective things are far from rosy and I see no economic hope on the horizon. And oil prices keep rising.
Colin Smith, Norwich, UK
The difference between the US and UK situation is also due to the most simple of economic principles - supply and demand. With increasing immigration to our small island - demand - and a slower rate of housebuilding - supply - prices will rise. Until this changes prices are unlikely to fall significantly. The only scenario I can see where prices could fall is a large number of repossessions coming on to the market at once if interest rates rise sharply, and money becomes more expensive, and people cannot afford their mortgages.
bwcc, London, UK
Unfortunately, most of the present "Want it Now" generation cannot remember the real Boom-and-Bust periods the UK went through, or have chosen to forget what they were really like...mortgage interest rates at 15%, could not even get a mortgage over 2 1/2 times your salary. It all goes back to the deregulation of the financial institutes, way before Black Wednesday. In those days Banks were what it said on the tin... a Bank, Building Scocieties gave you loans to buy a house, and Insurance companies sold you insurance but in the great free for all that followed, morals and business accumen were thrown out the window. What has followed on in the great pursuit of profit is finacial meyhem, and it's all coming home to roost. It's time the powers-that-be reigned in the financial institutes and make them a bit more ccountable rather than, what will make the biggest profit. Remember it was a Conservative PM who coined the phrase "The unacceptable face of capatilism".
Thomas, Las Pesqueras, Spain
Anyone who quotes Donald DUMSFELD cannot be taken seriously,
Samuel, Glasgow,
Actually, a weak pound and a slumped housing market will be "beneficial" to the UK, considering the pressing issues of today.
A weak pound will prove less of an impetus for Eastern European, Indian, Pakistani and Bangladeshi economic migrants to come here as they wont be able to send quite as much money home as they could before (you think they're here for our democracy / freedom of speech? think again). This will please the BNP, their ilk, and the "we're-not-racist-but-send-the-foreigners-back" folk.
A slumped housing market will mean that many first time buyers would finally afford houses even if it means higher interest rates. Oh and as for you lot who have all your assets tied up in BTL houses, and are fearful of having your wealth wiped out, I can only say this: this is CAPITALISM! The bedrock of progress.
Pete, Cov,
yeah all those poor rich foreigners having to go to geneva, boo hoo, they can go and take their inflation with them! finally with prices dropping like a stone hopefully i can finally afford to live in my own country ! and maybe London can stop subsidising the rest of the country too. We might even have to cut back on all the benefits we hand out to lazy wasters and scroungers. sounds good to me. bring it on.
phil, london, uk
Another rehash of the same stuff. You will have to come up with something new. , to try and make your point. And to say something like there is already anicdotal evidence of banks moving staff from London less than 2 weeks after the budget report is rubbish. No one moves that fast when staff are concerned.
james gallagher, london, uk
You are dead right on the non-dom issue... this is a big deal and will certainly affect the marginal entrant to the UK. What the British fail to appreciate in this era of civic cockiness, is that they effectively have to pay foreigners to live here. Without the appropriate subsidies, the current surplus of wealthy foreigners will rapidly turn into a deficit - perhaps it is already occurring - taking the London property market with it.
John, London,
Lau Tsu may be helpful here.
'Goiing to extremes is never best'.'
'Natures brightest day fades into night.'
'When things reach maturity, they decay of themselves.'
dr venables preller, Warminster, UK
Funny to see your bullish rhetoric turn bearish Anatole.
Dave, London, UK
But Gordon Brown promised us there would be no more boom and bust.
Surely this can't turn into another broken promise.....?
MarkS, Leeds,
To his great credit, Mr Kaletsky is being honest. The future may be as mild as others say but the truth is that nobody knows and the risks are significant.
The banks have rediscovered the value of that good old KISS (keep it simple, stupid) principle.
It is now for the rest of us to apply another - business - principle. Hope for the best and prepare for the worst.
John, London, UK
Don't forget that a falling sterling, should it happen, will be welcome for some, namely exporters. A slowdown in London might help resolve some of the imbalances in the UK economy, even if it means lower overall growth.
Dave, London, UK
You've got the short term forecast right, the long term one wrong.
The Bank of England allowed a British bank to go under, whilst European and American central banks pumped in liquidity. There were minor fumbles in handling the Northern Rock near-bankruptcy, but basically the system survived. However the American and European money was not a magic elixir that solves all economic difficulties. There are certain problems inherent in printing billions of dollars in banknotes, and these might become obvious a little bit further down the line.
The upshot will probably be that Frankfurt and New York have to scale back their ambitions as world financial centres. London, whose central bank hasn't had to manipulate the money supply in the same way, will emerge stronger.
Malcolm McLean, Bradford, UK
I agree. There is the wiff of an end of an era about recent events.
Bob, Chesham, England
Labour have borrowed too much and taxed too much and so
a slow down was inevitable anyway. An incoming Conservative government will need to control government
spending and so bring down borrowing and give selected
tax cuts, this would revive the economy. Wealth creation is
vital and so Corporation tax, Capital gains tax, inheritance
tax, tax on peoples pensions, need to be as low as we can
make them. As people get richer so the country and the
government get richer. Incidently the 10p starting rate of tax
needs to be reintroduced to help the working poor.
Roderick, Hampshire, England
I don't think the Treasury is planning any cutbacks in public spending, just reductions in the presently healthy rate of increase. Not a big problem; we can't go on increasing spending above real growth for ever.
Colin, Shrewsbury,