The Economy – Worse Than You Think 21

In the budget this week, Alistair Darling is expected to revise his prediction for the drop in GDP in 2009 from -1.2% to -3.4%. This sustains the Brown/Darling record of appalling predictions.

The CBI think it will be worse, at -3.9%. I think it will be yet worse, at -4.1%.

I spent Sunday with friends at the LSE dusting off my economic modelling skills. I should state the obvious, that the LSE is in no way associated with my predictions (though if they turn out wrong I reserve the right to blame their modelling!) It is also fair to say they found some of my methodology unorthodox, particuarly the need for a steady intake of Margaux to fuel the input assumptions.

I project GDP will fall by -4.1% in 2009 and by -1.8% in 2010. The Treasury is leaking -0.1% as their 2010 projection. Given the financial services sector is in shock and manufacturing output down by over 18% in the first quarter of 2009 year on year, I can only presume they are relying on massive expansion in the capuccino and dry cleaning industries.

I have assumed that Darling’s budget this year and next year will be close to fiscal neutrality, with a nod towards belt tightening. He has absolutely no room for fiscal stimulus and with an election in the next 15 months he can’t be too sensible.

But the fiscal position looks awful. I project a budget deficit of a massive 12.4% of GDP in 2009 rising to 13.3% in 2010. By 2011 our national debt will reach 1980s Italian proportions of 118% of GDP. Compare that to the 40% guideline for membership of the Euro.

That prospect will spark a collapse in the pound before mid-2010 leading to escalating interest rates, forced on the Bank of England as the government struggles to raise more money because the pound is such a bad bet. That will undoubtedly mean they will have to go cap in hand to the IMF within the next 18 months, but still will not be able to avoid those higher interest rates.

Inflation will come back, reaching 4.5% by April 2010 and shooting upwards after that to 7.1% by end 2010 and entering double digits in 2011. That will put an end to further quantitive easing. House prices still have a further 11% to fall before nominal prices start to increase from July 2010, but will still be falling in real terms. Unemployment will peak in March 2011 at 3.02 million.

The problem Darling faces is that he has no room for fiscal stimulus, because all the funds that may reasonably be raised have been wasted on the bottomless pit of Ponzi banking.

Because of the corner into which Darling has painted himself, and on the basis that New Labour have no stomach for radical restructuring of the economy and measures such as bank nationalisation, the only thing that would truly improve the prospect would be a radical budget rebalancing – perhaps a 2% increase in total tax yield combined with a 5% cut in public spending, over a three year period. That would reduce a raft of linked problems including interest rates, inflation, deficit and debt burden. It would accelerate unemployment and make the recession sharper, but would on my projections give something of a J curve effect.

The other thing that would help might be joining the Euro, if we could beg them on bended knee to accept us as a basket case. But the other European countries would be crazy to take us on.

I realise many people find spending cuts unpalatable. But we are in a very bad place. We are there because Brown and Darling failed to regulate casino banking, and then used all our remaining national credit to refund losses to the wealthy gamblers.

The economy is completely screwed – even worse than most forecasters and pundits are telling you, and certainly worse that Darling will admit on Wednesday.

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21 thoughts on “The Economy – Worse Than You Think

  • kardinal birkutzki

    What did your pal David Icke have to say? I presume you took counsel from him?

  • kathz

    Does your economic modelling take account of the large number of new graduates looking for jobs this June/July and burdened with far higher debts than ever before? I can’t begin to calculate the effects on the economy as I don’t have that training and my comments and phrasing may strike you as naive – however, I’d like to know. Obviously students aren’t required to pay back fees and students loans until they earn a decent wage but many have incurred additional debts through bank loans etc because in many parts of the country the loan is only just enough to pay the rent on self-catering accommodation, whether at university or private rates. When/if new graduates get jobs, they will find it very hard to get mortgages and will need to keep their spending down in order to repay debts – I don’t imagine banks will want to extend their overdraft facilities.

    I realise the Scottish and Welsh situations are better than that for English students.

    I’m sickened by the way students have been encouraged to incur massive debts with the false promise that it will improve their job opportunities and wages. I see plenty of reasons for students to study but the predictions of high incomes always seemed false. In my experience, the students who get the most lucrative jobs are usually helped more by their parents’ wealth and contacts than by their own industry and intelligence.

  • Rob

    ‘The economy is completely screwed’..

    Oh, how I like people who give it straight. Such a refreshing change from politicians, journalists and economists spinning like Topsy.

    The general public simply have no idea, none whatsoever, of the fallout from the ‘downturn’. Right now, the boost to the economy that was given by a ‘strong’ economy and equity withdrawal form ever rising house prices has been replaced by an ever rising government debt burden. Brown has tried to ‘fill the hole’of ever expanding personal debt.

    So the ever expanding debt bubble has transferred to the taxpayer. Not any longer. The truth is about to start hitting Average Joe.

  • kardinal birkutzki

    My apologies. Just read Harry’s Place. Had no idea you actually were a certified nutjob. I shall therefore refrain from now on of making fun of the afflicted..

  • Leo Davidson

    kardinal birkutzki, I have some gold pieces. May I cross your bridge, please?

    David Icke? WTF has he got to do with anything here?

  • JimmyGiro

    Maybe we can ease the food expense by recycling Charlton Heston into protein biscuits, and sell Harriet Harman to the Saudis as an exotic dancer.

    Or maybe we should stand outside the American embassy, with doleful expressions, wearing scull caps and dreadlocks; could be worth 100 billion dollars over 3 decades.

    I’ll get my coat.

  • George Dutton

    “The economy is completely screwed – even worse than most forecasters and pundits are telling you”

    Even the LSE.

    It’s all being held up with bolster wood…and VERY strong glue.

    “House prices still have a further 11% to fall”

    Try 60/70%…Time will tell.

  • ken

    Kathz, Yes, I’ve wondered for a long time. Which should be rescued first, the language or the economy? Governments seem to destoy both these days.

  • Jon

    To reduce public expenditure, I propose that the MoD sells a good proportion of its land (it owns 1% of real estate in the UK, if my sources are correct), which will raise billions in revenue even if prices are reduced to fit the financial environment.

    This could be accompanied with a decent cut in *large* defence spending, starting with Trident (sadly it is the cost of large projects that reduces budget for small items, like troop helmets and anti-explosion foam in aircraft. I am not pro-military nor pro-war, but if UK troops are deployed, it is reasonable for them to demand protective equipment).

    The ID card project is now so universally unpopular, the govt would do well to abandon it, but even if it doesn’t have the stomach to do so it could put it on hold, citing cost as the reason for deferral.

    @kardinal – do by all means outline your own predictions if you wish – Craig may even respond to them. But random trolling will alienate you from serious commenters here, and will meanwhile not have the effect of making Craig’s views unpopular.

  • Jon

    “I agree. ID cards and Trident would be top of my list.”

    In several instances (this one included, I suspect) Craig is replying but the resultant post has my name attached. Just so no-one thinks I am having a conversation with myself 😉

  • Jaded

    ‘The other thing that would help might be joining the Euro, if we could beg them on bended knee to accept us as a basket case. But the other European countries would be crazy to take us on.’

    I have no doubt we will join the Euro eventually and the only reason we haven’t yet, in my opinion, is that ‘rip off Britain’ would be harder to thrive with us in the Euro. When the political agenda can wait no more we will join.

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