UK Economy: UK Economy 2009

June 29, 2010United Kingdomby EconomyWatch


Could the UK economy get any worse? Data from Q1 2009 on the UK economy have delivered an unequivocal ‘yes’.

The economy was declining at an even quicker rate than originally suspected.

The mood became increasingly grim, with headlines such as ‘The Lights Go Out as Recession Deepens’, as electricity usage dropped for the first time in years. Speculator Jim Rogers said the UK had nothing left to sell, and the LSE and FTSE100 fell to multi-year lows in tandem with other stock markets.

All sectors of the UK economy seem to be struggling, with historic lows across pretty much every measure – consumer confidence, house price drops, new home sales, retrenchments, manufacturing activity and demand.

Prime Minister Gordon Brown had been one of the first world leaders to move to capitalising and even nationalising ailing financial institutions, and his boldness of action in the autumn of 2008 had briefly revived his popularity. However his years presiding over the easy credit years as Chancellor (the equivalent of Finance Minister in other countries), and his glib statements that he ended ‘boom and bust’ came back to haunt him.

His economic stimulus package, announced in January, was one of the most ambitious worldwide. It will add to already high debt levels above 40 per cent of GDP, leading to speculation that Britain’s sovereign debt ratings would be downgraded. This would be a disaster of national proportions, leading to higher to higher debt servicing costs, a further loss of confidence and the possible decline of the City of London. Sterling has continued to decline as confidence in the British economic leadership slides.

Supporters of the Labour government argue that moves taken by Brown and Darling mean that the UK has acknowledged its malaise and taken the necessary bitter medicine quicker, and that this will lead to a quicker recovery on the other side of the recession.

That assumes, of course, that there is an ‘other side’, and with the gloom surrounding the country in 2009, that in itself is not a foregone conclusion.

By the end of 2009, the UK economy is expected to have contracted 3.2 per cent (although some economists are revising that figure downwards), with the UK budget deficit ballooning 11.3 per cent of GDP, from 5.3 per cent, and British national public debt expanding to 59 per cent of GDP.

Inflation is no longer a concern thanks to the collapse in energy and commodity prices. It is expected to be around 0.5 per cent this year. Indeed many argue that deflation is now a bigger concern. As such, the Bank of England is expected to cut Interest Rates to 0.5 per cent by the middle of 2009.

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