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Where next for the British economy?

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By now everybody except the most wildly deluded of optimists must see that the UK economy is in absolutely terrible condition. Two cornerstones of the country’s economic identity, the property market and financial services industry, have been given a kicking that they may take years to recover from. Interest rates are at an all time low, punishing savers harshly, yet credit remains elusive and nobody is terribly keen on putting money back into a schizophrenic stock market just yet.

Businesses are dropping like flies and personal insolvencies are at record highs. Billions of pounds of bailout money has failed to solve the problem and a government which once proudly boasted of its economic credentials has now seized up in panic, completely incapable of dealing with the situation. The problem with the economy is that economics is a complex science which is sometimes counterintuitive and doesn’t always produce quick fixes – politicians who can only think as far as tomorrow’s headlines are not the best people to be left in charge of the nation’s long term economic well being.

So where does that leave us? We’re a nation that’s grown accustomed to individual wealth and national economic power, are we really facing the end of all that? Is Britain on the verge of returning to the bleak days of the seventies, when the country was little more than the rusting husk of a collapsed empire?

It’s hard to say how things will play out in the financial services sector, which accounts for around 9% of the country’s GDP. There are a number of unanswered questions:

  • What kind of rules will the government impose on the UK’s financial services industry following public anger over the recklessness which led to the recent economic collapse?
  • How will the British banking industry adapt to the post-credit crunch world? The business models of the past twenty years led to catastrophic failure, so how will the banks rebuild themselves into profitable, sustainable businesses?
  • Is it actually possible for the UK financial services sector to rebuild itself, or is it irreparably damaged?

This is, of course, a simplistic way of examining the problem – the real issues surrounding any recovery of the sector are numerous and complex, which is why you can take most predictions with a pinch of salt. The fact that you’ll struggle to find any two ‘experts’ who agree on what the future holds for Britain’s ‘financial services powerhouse’ should be a good clue that nobody can really say with any degree of accuracy at this point. Forget what the politicians and the bankers tell you – we’re in the realm of chaos theory right now.

Ultimately, however, we’re confident about the broader economy, even if the financial services sector goes down, it’s likely that other sectors will pick up the slack eventually. The country has a reasonably well educated, motivated and resourceful workforce, enterprise is strongly encouraged here – it may well take a couple of years to recover, but it seems reasonable to assume that sooner or later it will be business as usual for British companies that aren’t directly involved in financial services.

History has shown the stock market to be very resilient, bouncing back from all sorts of catastrophes within a year or so – which isn’t very surprising, given that it is entirely composed of organisations whose sole reason for existence is to generate profits and deliver shareholder value. Companies falter and fail, but they’re always replaced by leaner, hungrier, faster businesses – the stock market plods merrily onwards, regardless.

As for the housing market, all bets are off. The market was propelled to ridiculous heights over the past decade purely on the back of a speculative bubble fuelled by cheap, readily available credit – those days are gone and they aren’t coming back. You can talk until the cows come home about supply and demand, shortage of quality homes, over-crowding and all the rest of it, but ultimately the money has to come from somewhere, and the banks aren’t likely to start handing out easy money any time soon.

Recent reports have suggested another average 8% drop in house prices over the next two years, before prices start to pick up again. Like all housing market predictions, this one seems to have been plucked out of thin air by an organisation with a vested interest in painting a rosy picture. We think it’s wildly optimistic. The market will only ever support prices that people can afford to pay, and that is primarily governed by the amount of money banks are willing to lend. With that in mind, it’s hard to see anything other than an ongoing bloodbath for property prices and a significant chunk of the population stuck in negative equity for a long time.

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