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Recession Greatest Hits

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Stephanie Flanders | 17:45 UK time, Friday, 23 January 2009

Every recession tells its own story - in the '90s, it all began with a housing bust; in the '70s, it was the rocketing price of oil. In the 1930s you had a global stock market crash and a lot of runs on banks.

This one has shades of all three - you could call it a Recession Greatest Hits. As in the past, the sheer pace of the decline has taken everyone by surprise. In fact, as this chart from Fathom Financial Consulting shows, the decline in the first six months is actually very similar to the average of past recessions.

Fathom Financial Consulting graph showing GDP difference from peak, per cent

Now that it's hit, there aren't many predicting a speedy end. Growth in the new year is about as optimistic as it gets. It could be two or three years before the economy gets back to where it was - and the 2012 economy could look rather different from the one we had before.

What will that post-recession economy look like? Chris Giles had a good stab at the answer in this morning's FT.

There'll be a smaller financial system, for sure. And lower house prices. Maybe even a return to selling stuff to the rest of the world.

Martin Weale, the director of the National Institute of Economic and Social Research, said today that he thought the fall in the exchange rate could pave the way for a British manufacturing "renaissance". Well, it could happen.

The 2012 economy should also be more frugal. We and the government will have to be more sensible with our cash. You can expect it to be a safer economy, less prone to excess. Just don't expect it to be quite as fun.


  • Comment number 1.

    The trouble with trying to make predictions for the recovery is that it's not at all clear that any recovery will prove sustainable. After all, while the credit crunch is central to our current problems, the crisis seemed to be brought to the boil by the rising price of oil, food and other staples.
    I know that these prices have now largely fallen back (or even collapsed) but, given that the development of new energy sources seems to have been scaled back as prices fell back, and that the population continues to rise as dwindling water supplies in much of the globe makes previously fertile land unproductive, I can't quite see why commodity prices won't go through the roof as soon as there is any sign of recovery worldwide.
    I'm not qualified to say what effect that would have on, say, currency movements, but it certainly seems to me that we might soon have to deal with a world in which sluggish growth is combined with the problem of prohibitively expensive raw materials and essential resources. As we're running out of oil and still seem to be determined to build millions of houses on our best farmland, I can't see us coming out of this particularly well.

  • Comment number 2.

    Not so much fun? Cluedo in front of the fire, singing by the piano a jigsaw on the table. At last a return to normality.
    Just need to declare war on Germany [or France ] bring back rationing and the gold standard and all the Daily Mail ,Express and Telegraph readers will be happy.
    On the other hand, clever purchasing increased lesiure time and a manufacturing boost could lead to a simpler lifestyle but much more fun.

  • Comment number 3.

    Hello Stephanie,

    In an earlier blog you state it is astonishing that "no-one" saw this recession coming - I think our Queen murmured an embarrassing question about this. By "no-one" of course you mean the multitude of media commentators, bankers, businessmen and politicians in the "mainstream" of economic and political life. You later admit some "no-ones" did see this coming. Who were these others? People like me for instance? (See my own internet blog for this, starting some three years ago. See also my posting on the "Anglo-Saxon Syndrome", aka ASS.)

    So this begs the question, why did "no-one" see it coming? Because without answering this, all prognostications from "every-one" about the future of this recession are meaningless. It's like a doctor prognosticating the progress of his patient's serious relapse without bothering to investigate a diagnosis. So Chris Giles's "stab at the answer", which I can't read because I don't subscribe to the FT (interesting you direct readers to a resource most won't be able to make use of), is almost certainly wrong, because I'd wager Chris was another "every-one" who missed the diagnosis - he too wasn't paying attention.

    I don't wish to take up too much of your space, but the ultimate cause of this recession is environmental. It was the huge hike in oil and many other vital raw material prices that truly punctured the bubble. Of course criminal malfeasance in the financial sector, aided by a criminal naivety in the political and economic arena, did its bit.

    For a very brief moment at the end of 2007, and the beginning of 2008, we saw what a resource constrained world looked like, and again, "no-one" saw it. But that doesn't mean it didn't happen, I saw it and so did others, because we have been paying attention, and it was not a pretty sight. This event was in fact a dress rehearsal for the Club of Rome's "Limits to Growth". Oil in particular, "peak oil", is what is going to ensure that this "recession" is like nothing that has ever happened to us before, so trying to prognosticate the future course of this "recession" on the basis of previous recessions is futile.

    This "recession" is in fact a much more profound and revolutionary economic, political and social event than you and "every-one" else understand. You are still not paying attention, and until you do, we have no hope of getting ourselves out of it.

    I have (some) answers but I have gone on long enough, if you visit my blog you can peruse them at your leisure, but what I can say is that none of these answers is yet to be heard from "anyone" else.

    Best wishes from this "no-one", and good luck for 2009, we're all going to need it.

    John Monro, Wellington, New Zealand

  • Comment number 4.

    So can we say at which point similarities will actually be seen and whether or not we can actually predict the "bottom" and the upturn?

  • Comment number 5.

    Hi Steph...

    Can I just ask where the money is going to come from?

    If the banks are smaller and lend less... Where is the money going to come from to inflate the economy back to where it was in 2007? Will the government print it? I mean, at the moment, 97% of it is borrowed into existence.

  • Comment number 6.

    Wow! 4 blogs in a day. How come that layabout Peston can only manage one?

    I always wondered why economics was referred to as 'the dismal science' - your piece on the failure to predict the recession/ slump provides all the explanation anyone could ever need.

    By the way, I liked your question on Newsnight last year to David Cameron about the tax advantages and married/ unmarried parents - nice one!

  • Comment number 7.

    Firstly welcome back.

    Your graph needs adjusting. The figures for Q2 of 2008 were revised downwards today to show a slight decline. So technically speaking we were already in recession at the end of Q3, making Q4 the third quarter of 'negative growth'. (Why can't they use 'shrinkage' instead of an oxymoron like that? How can it be growth if it's negative?)

    Like John in #3 I was forecasting a recession to friends and family back in early 2007. Sadly I didn't record this online to prove what a clever bloke I am. Kudos to you John.

    When people are borrowing 10x multiples of income to secure a mortgage (and when the lenders are stupid enough to lend it) and when 1st-time buyers are unable to purchase a property, the housing market is on the verge of meltdown. So house prices are insane.

    When the risk premiums on subprime lending are less than 0.1 percent over those on AAA then someone has forgotten that risk even exists. So lending is insane.

    When banks hold loans worth 3x the Gross National Product. That's insane.

    When the total value of all the Credit Default Swaps (just one single form of Derivative which didn't even exist only a few years ago) in existence reaches 3x the entire planetary GNP, that's insane.

    You can extend the same notion to many areas of fiscal and economic activity over the last 10 years.

    Perhaps you can answer this one.
    We are being constantly told that 'normal' conditions will not resume until the banks are solidly founded and when credit starts flowing again. You own colleagues, Messrs. Perston and Davis flog this line, as does every other economic pundit, it seems. A case of being "conventionally wrong", perhaps, as you put it elsewhere.

    But why? It was an excess of credit and lending that got us into this mess in the first place. We borrowed and borrowed and remortgaged and shifted balances from one credit card to the next. Banks offered outrageous loans to bad risks (RBS to a Russian oligarch, 2.5 bn pounds written off).

    If credit and lending was the cause how come it's supposed to be the answer?

    This is like the Govt. telling us that it was the venal greed of the public and businesses in taking credit everywhere it was offered which was the cause of the storm. Then telling us that borrowing another 500bn sterling is the way out of the storm. Why is our borrowing very bad, but theirs very good?


  • Comment number 8.

    true-liberal makes a good point at #5.

    Banks are blighted no matter what they do. On the one hand they've created the financial storm by reckless lending and investments. So they have little left to lend out. Their Tier 1 levels have to rise to assure other parties that they are not as heavily 'leveraged' as they have been recently. They somehow have to show that they are risk-free, that all the poisonous rubbish sloshing around in their portfolios has been accounted for.

    Once that's done they can resume lending, but it won't be on the same basis as before. Risk must be properly priced in and bad risks rejected. Securitisation and the wrapping of derivatives has vanished as a way of creating funds to lend from thin air. So the quantity of lending will be significantly reduced for a long time. Lending may have to return to the old-fashioned idea of lending out retail deposits, which in turn requires us to start saving again at a time of zero interest returns on saving.

    And yet; the Govt. insists that they MUST lend to get the economy moving again. This is just playing politics. Lending will not and cannot return to 2006/7 levels for many years to come. You say 2 or 3 years yourself to return the economy to where it was, I would have thought that a decade was more reasonable. After the 90's recession some people were in negative equity for 10 years. It would be better if the Govt. recognised reality, lending has to wait until the economy is stable, it can't be the cause of stability in itself.

    The Govt. may nationalise a bank or two. It could then lend all they want to, to all-comers. Thus completely distorting the market in lending and dragging the other banks after them. But would you save your money with an institution which was determined to ignore risk and lend to anyone? It would be fueled from Govt. money, that's taxes and further borrowing. What the Govt. are asking the banks to do is repeat the exact mistakes which got us into this mess in the first place.



  • Comment number 9.

    What a sad state of affairs.

    The UK's economic superstars who demand massive remuneration to provide their pronouncements on the future of UK plc couldn't see a super nova about to explode in their faces at 15 paces.

    I've been in finance for 20 years and it was obvious 3,4,5 years ago that, if the housing boom continued, the end would be a disaster. And the longer it continued the bigger the disaster.

    I admire your chutzpah. But you, Stephanie, along with the vast majority of 'economists' should resign from your posts along with the jokers called a Government.

    Please don't post too much. I believe you as much as I believe one James Gordon Brown. After all, if you couldn't see it coming, how the hell are you going to see how we are coming out of it.

    PS - WE WON'T!

  • Comment number 10.

    I read that comment in the FT and I couldn't help thinking that it was weak. What exactly would Britain - with its low value sterling - be offering anyone? We produce so little that can't be picked up elsewhere for a fraction of the cost that I think this is fanciful to say the least. We cannot hope to compete with China, Brazil, India... Also, China, in particular, is no fool on the diplomatic front either. It's courting everyone with training and infrastructure projects which not only helps to develop the recipients' economies, it also allows for easy removal of raw materials and opens up the market for Chinese finished goods. Inscrutable? No, just bright. Also, they're sitting on loads of cash. Now, if I were a Chinese businessman, I be popping around to various places in Latin America and Africa on regular basis and picking up a few comodities at rock bottom prices. When the music starts again, they won't want pay top dollar for any of this stuff expecially as they will have the manufacturing unit cost advantage?

    When we in Britain wake up from this particular nightmare, it will be to world where credit, investment and commerce have moved and China will be sitting on full order books again - tooled up and powered up - and wading into Sam's Backyard, Africa, Russia and most of Asia. It will also be keeping the West in virtually everything, too.

    A slimmer financial sector? Well, yes, that's as result of recession-prompted consolidation - ditto - any other commercial concern that cannot grow organically or has become enfeebled, will be snapped up cheaply by its rivals or asset-strippers.

    We'd better go for something interesting and high value and be PDQ about it. Who cares what it is? As long as it's something real and not the absurdist derivatives and securities (contradiction in terms) which only a lunatic would have backed. Unlike John Monro, Wellington, New Zealand, I've been predicting this calamity since 1999. I went to Dublin and a 1930's three-bedroomed semi was for sale for #250,000 at the same time that houses were springing up like mushrooms after a autumnal shower. When you glanced in the newspapers the average salary appeared to be about #25,000 (Punts). I trained as an archaeologist but even I thought this was a bit strange.

    What Mr Gray fails to mention is that there is a good chance that some of those houses in Britain, Ireland, Spain... will not be worth what for paid for them. Couple that with limited access to credit from the streamlined and now efficient banking systems [sic] and it is going to feel like a very austere landscape.

    Who will be investing in the British export-led Renaissance? What will fuel it (no more North Sea oil or gas)? Nuclear power? Furthermore, if it requires imports to sustain it, how will we with our low value pound be able to compete with countries like China and India with their lower production cost base and wads of foreign exchange?

    The British tendency to mock foreigners will come home to haunt us. We are going to look pretty second rate in the coming decade. The Germany will recover; France will recover; Britain will struggle.

    Reinvention: fact or fantasy? Jim Rogers is right. He taking the quick boat to China and who can blame him. The only problem for him is that he occupies a world where the only thing that seems to matter is money and the "Great Game". What a tedious existence. Is he to be envied? I don't think so, I think like all leeches someone should stub out a fag on him.

  • Comment number 11.

    " ... the government will have to be more sensible with our cash."

    I am just amazed that the Government can commit us to virtually unlimited public expenditure without this being challenged in Parliament. Surely, the way it is supposed to work is that the government of the day comes up with a budget - a specific plan for the coming year - and this gets approved by the Houses of Parliament and becomes law. It clearly will contain some contingency allocation for unforeseen circumstances, which the executive have the power to reallocate without coming back to Parliament for approval. If they needed to spend beyond this, then you would expect them to have to come back and get general approval for the increase - why is this not happening? Instead they are risking trillions without anyone saying anything.

    You would think they would have to come up with a specific, detailed, fully costed plan and then they would have to convince people that it was going to work and get the approval of MPs by winning a vote of confidence. As it stands, they are committing the country's expenditure for probably decades and yet nobody seems to be standing up and saying enough's enough.

    It looks like the MPs (on all sides) have got so cosy with their second home allowances that they've forgotten their responsibility to their constituents.

  • Comment number 12.

    I think that, unfortunately, we're going to end up saddled with structuraly high (2 million +)unemployment again. In other words we'll be back where we were for most of the 80s and 90s.

    Speaking as a Labour supporter, this is a massive dissapointment and shows that Brown was wrong to rely on financial serivces and the housing boom for so long.

    Dan xx

  • Comment number 13.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 14.


    The line on the graph is steeper and is not stopping is it.

  • Comment number 15.

    As a first time buyer, the fact that we've been priced out of the market for years was a good indication that things were going to blow. This is coming from a dual income, no kids family where both are earning well over the national average.

  • Comment number 16.

    If you are looking for ways out of this mire then I do not think looking far into the future is the answer.

    What we need is to arrest the fall that is now taking place.

    We have to start with the current economic structure and before unemployment really rockets.

    There is some pent up demand in this economy that could be tapped.

    The first time buyer market is stuffed with stifled demand.

    But to get the benefit of this demand a few things will have to happen.

    The properties the FTB can buy will need to come down to fair value.

    The faster this happens better.

    I saw this last source of demand threatened by the stupid idea pushed by Mrs Beckett that FTB should rush into buying at this stage in the market saddling them with negative equity.

    What is needed is for FTB house price to be forced down to the level where they become affordable at 3.5 x multiples of the average wages for this purchaser group.

    At 18000 that is
    18000 X 3.5 = 63000

    So if these homes were 120000 at the peak of the market then the correction that is required is around the 50% mark.

    A lot of people believe that this 50% correction is what we will see but over a long period of time and a lot of jobs and potential buyer will be lost over that period.

    So in conclusion we need the Estate Agents, RICS surveyors, TV property pundits, Media & Politicians to come out a say everywhere that fair value property prices are now 50% less than they were at the peak of summer 2007.
    This would put a bottom in the market and connect the bottom rung with the purchasing group who will spend.
    Once activity started again then carpet furniture kitchen etc would then be purchased.
    It would also reduce the cost of moving up to the next rung in the housing ladder.
    This of course is dependant as is everything else on credit being available.

  • Comment number 17.

    Dear Stephanie,

    You appear to be taking to this blogging business with the zeal of a newcomer.

    Just one request, please treat this as a two-way discussion - there's more to the replies to your previous item than simply a load of "I told you so's".

    You'll find that many of these respondents make more sense than the so-called "experts", who despite failing to see the bus coming, are still trying to lecture us from their hospital beds...

    Anyway, take another look at that graph.

    Look at the inflexion of the "real" (green) line and compare it to the "mean" black line. I think you'll see that the extrapolation for the next two quarters continues downwards.

    I take no joy in this (as it affects us all), but the optimists have got it wrong. The (wrong) measures aren't working; in fact they're making things worse.

    This is because the approach taken has been (a) mechanistic, (b) over-optimistic, (c) too simplicistic and (d) politically expedient.

    Fact: there will be no "green shoots" until the roots are healthy. That means addressing the fundamentals, getting back to basics (not as a political slogan), understanding the difference between value and risk and stop trying to manipulate and tinker short cuts.

  • Comment number 18.

    #16 PortcullisGate

    Yes you are right - house prices have to come down, but that traps lots of those who have already bought in negative equity.

    Another problem is that there is no incentive for people holding property to sell. Because the interest rates are so low, they are better off holding the tangible property asset because that isn't going to disappear like the value of money can. Until money has a value reflected in realistic interest rates they are better to sit tight. So the low interest rates are holding the prices up.

    The only real solution is to work off the debt - either repay it, reduce it to manageable proportions by devaluing money, or default on it. I think the Government is trying the second, but heading for the third option.

  • Comment number 19.

    18. At 11:27pm on 23 Jan 2009, croydo

    Negative equity is inevitable but as long as these people keep jobs they can stay in their homes and play the long game.

    They should not have bought at the top end of the market that is their responsibility.

    We need the fastest route out of this and to get economic activity moving again before it falls of a cliff.

    As I said all other parts of the economy are in contraction but there is demand available but it has to be freed up in the right way

    House prices need to fall 50% to fix a viable bottom so activity can start up again.

  • Comment number 20.

    Many more erudite than myself have commented on how expert opinion failed us. It is amazing though, how just about any (wo)man on the street was forecasting the demise of the British economy, yet the experts were not. One assumes such denials were deliberate? After all, bonuses, expense accounts, and maybe even jobs might have suffered had the truth been broadcast any earlier than absolutely necessary.

    What is of particular interest to me is where the UK turnaround will originate. We produce nothing. Our technology is a generation behind. Our education system produces all manner of social know-alls and media studies graduates, but pitifully few people with skills of any value.

    Might our turnaround come from the rising generation? Well, let's see: thirty years of social engineering has produced a generation of semi-literate 'yoofs' whose only talents appear to be spitting, swearing, and producing offspring for other people to fund. The teaching 'profession' has become a mouthpiece for left wing propaganda. And let's be honest; all the left wing ever did was live off the right. So one doesn't hope for salvation there.

    Nor do we appear to possess a collective will to achieve anything meaningful. Foxes have more rights than unborn children. Murderers, paedophiles, and rapists are given every advantage possible so they can be returned to society and murder, molest, and rape all over again. Our nation is corrupt, degenerate, and lazy. Our politicans reflect our collective values. That's how come they got voted into power in the first place. We are overrun with ethnic imports. Our currency is heading south. All in all, a pretty sorry state of affairs really.

    So...where's the good news..? And this turnaround all you 'expert' commentators trill about..? Clueless! Just nodding doggies churned out by a witless education system.

    Poor Britain. Once the envy of the world. Now just the poor relation, and the destination of choice for every malingering, scrounger under the sun.

    When a turnaround does come, Britain will be the recipient not the originator.

  • Comment number 21.

    Fight, Battle, Weapons, Tough, Britain can win. Why are these words associated with conflict being used to support fiscal and/or monetary policy changes by the dear leader. Is it to invoke the spirit of the blitz and prepare us for rationing ?

  • Comment number 22.

    Great to have you back Stephanie! We have missed you. Though Hugh Pym has been good too. Hope you don't feel you have missed out on all the fun we've been having the last few months.

  • Comment number 23.

    Has Meltonmark got nothing better to do at 5.45 in the morning than post sub-Daily Mailesque/Talk Radio nonsense (with no discernable facts to support)?! The recession is bad, but stepping back and taking a longer view, arguably UK plc and its people have done rather better over the last 30 years than its predecessors did over the previous 30.

  • Comment number 24.

    "This one has shades of all three - you could call it a Recession Greatest Hits. "

    The important thing for an economist to do is to try and understand how we came to be in the mess we're in. It is impossible to propose any solutions to get us out of this situation or prevent similar crises in the future without that understanding. At the moment that understanding is completely lacking from BBC journos and the media in general. Or is it? Is it really true that the general population as a whole has a deeper understanding of basic economics than the actual professionals(sic), or are you just making excuses to protect your own backs?

    So far the whole credit crunch and inevitable, yes INEVITABLE, recession that has followed is absolutely nothing more than a house-price boom-bust. Why do I say that? For the simple fact that in the Summer of 2007 when the banks stopped lending to one another they did so because of the expectation that house prices (which had already peaked in the US - quite important this, in understanding cause and effect) would drop. If the banks thought that house prices were going to stay where they were in July 2007 they would have been happy lending to one another because they could get their money back by simply repossessing the houses of defaulters. They didn't think they could, because they knew prices were going to crash and they wouldn't lend to one another because they didn't know how exposed the other banks were - all the banks knew there was a strong likelihood that other banks were bankrupt in 2007. This was at a time of high employment, high consumer confidence and low interest rates. So the banks though house prices were going to collapse at the same time that what seemed like the entire media, including the BBC, had 'experts' telling us that the economy was doing well. It is understandable that the banks didn't issue press releases saying they thought house prices would crash and they thought they were all bankrupt. What is not forgivable is that economics journalists did not take to task the banks and politicians when this was building up (which was obvious to a very large proportion of the population for several years beforehand). What is outrageous is that ther are still those in the media that still trot out the BS about this being a credit crunch, leading to markets collapsing and house prices falling and now astonishingly (LoL) a recession. No. The house price boom caused the credit crunch, the collapse in the markets, and the recession. A large proportion of the population saw a large asset crash/economic downturn coming years ago because of rocketing house prices and they were 100% correct in their assessment of the situation. This is not about pessimists eventually being proved right, it is about realists that are capable of taking an objective view. Your attempts to dismiss those that saw this coming a mile off is nothing more than an attempt for you to cover your own (and many others) incompetence.

    This recession is not a "greatest hits" as you put it Stephanie. So far ALL (almost all - the high levels of unsecured debt played a part too) it is is a housing bubble being burst (the credit bubble grew on the back of the housing bubble). Yes, there were numerous reasons the boom went on longer than expected - all the dodgy lending practices and dodgy financial products all made possible by an atmosphere of greed and denial of anyone with a different view - dismissing someone with an alternative view in this manner is one of the core ingredients of bullying. If the banks hadn't behaved like this, then the bubble would have burst around 2004-2005 which is when educated people at sites such as were expecting it.

    There are two time-bombs that could turn this very large house price recession into something altogether more unsettling (the entire banking system failing is not a problem for the world - they can easily be replaced with monkeys). The problems are the level of spending by our government in its crass attempt to getting elected again. The damage this will cause to our economy and future generations is enormous. The second is the simple fact that we are running out of resources (and the global population getting bigger). The global peak in oil production is not too far off now and that little spike in oil prices recently was a little taste of what is coming in a few years time. This Country is in a dreadful position to deal with this situation with the chronic underinvestment in sustainable transport (i.e. rail) and even now the government has given the go-ahead for the third runway at Heathrow, which will never be economically viable (with the depression and future oil prices limiting demand).

    No doubt when the global supply of oil does start decreasing Stephanie, you will write a blog telling us how nobody saw it coming.

  • Comment number 25.

    I have to agree with the general tone here - that many ordinary people could see that we were heading for trouble when houses became unaffordable to first time buyers and 50 year mortgages were being created.

    I do wonder what effect words had on the developing situation - specifically the words of Gordon Brown who said that boom and bust were over. Did everyone then assume that these economic cycles were actually now in control? Did the government and its watchdogs relax so much that the clear signs of trouble ahead were ignored?

    I do feel that GB worked in blinkers, and still does for that matter, preferring to see the good in any situation and attribute it to himself, but to ignore the signs of rising problems and attribute them to a global phenomenon.

    It also worries me that we have someone in charge of a recession who never expected one in the first place - and this is probably the worst part of it all all - GB steered us through ten years of relative global calm, thinking he was doing a great job, and was then faced with rough water from a global problem, only to find he had no idea how to steer at all.

    It's a familiar enough scenario - anyone can drive at 90 mph on the motorway when conditions are good, but it's just not enough to say "It's the weather's fault" when the driver loses control of the vehicle in bad weather. We are spinning and sliding about with GB still saying "We will come through this" - well of course we will come through this, but I would not like to predict what shape we might be in by then.

  • Comment number 26.

    I'd certainly hate to be in the position of actually having to predict future developments now. There are so many variables: energy supplies; food supplies; cultural changes in attitude to debt, savings and property; problems with an education system which mass-produces touchy, innumerate illiterates; unpredictable migration patterns as we become less attractive as a destination but as climate-driven wars make some other places uninhabitable; the possible (but not certain) emergence of new rivals and trading partners around the world; the danger of a crisis in democracy in Eastern Europe, or in the cohesion of the EU, or in the viability of the IMF; the possibility of a crash in the value of the dollar... Dramatic developments in any of these fields would have significant and unpredictable consequences for all of the others.

    I may have got lucky in the past, and I may spot the odd trend on a day-to-day level in the future, but beyond a broad feeling that a lot of people are about to have a very hard time, I'm generally coming back to Mark Twain: nothing is certain but death and taxes.

    Reading all the comments above, it's fascinating to see how we all keep coming back to this question of forecasting: why were the amateurs better at spotting the problems before the professionals?

    I suppose one possible explanation is that the financial world has developed a series of specialisations, each with its own logic. This logic evolved with the markets, and yielded good results until those markets faltered: basically, we're seeing a sort of economic climate change, during which highly evolved organisms, beautifully adapted to their accustomed niches, will die because their world has changed. Perhaps only those of us a little removed from the system were in a position to see how each micro-climate was part of, and connected to, a wider and radically unstable system.

    In fact, I think the BBC economists have done a brilliant job; the fact that Peston (for example) is accused of treason by some people for 'talking down the market', while being savaged as a Labourite by others, suggests that he has been right about most things, most of the time.

  • Comment number 27.

    A niggly point perhaps - I'm not an economist but I do care about decent presentation of quantatative data: two points (i) maybe all economists think in quarters but not everyone else does - the horizontal axis of your graph needs to say what the units are and (ii) the percentage growth figures are pretty crude numbers. They are not very precise - error bars would give a better idea of the uncertainty of our actual knowledge.

  • Comment number 28.

    "You can expect it to be a safer economy, less prone to excess. Just don't expect it to be quite as fun"

    Anyone in the long and growing list of victims of repossession (enforcement of contract ..) and other ghastly court proceedings is going to read that and wonder if they still live in the same country as a year ago. To whom is it addressed precisely. Everyone?

    Can I PLEASE urge you to give some prominence to the reality of the dispossession THAT this downturn is causing.

    Last night the Chancellor made clear that he believed this Guvt is handling the recession much more pro-actively than the last and reiterated his view (indeed the PM's view too) that if we all work at it we'll come thru it.

    That's fine except during the 'coming thru it' thousands of ordinarily hard-working and responsible folk - and companies - are going to be dragged through the state's Dickensian legal machine, being in the process subjected to possession orders, repossession, bancrupcy, foreclosure, seizure, bailif and sheriff warrants and all the ghastly panoply of measures that Britain seems to consider appropriate.


    This is UNACCEPTABLE. I have consistently campaigned wherever I have been able via this site, Church, MPs to have these mechanism STOPPED. They should be re-examined with a view to considering what is fair and reasonable under the circumstances. The BBC should be campaigning too, not just handing out homely advice about how to cope. Many, many will NOT cope and will have their lives ruined for all time. I seem to be in a minority in this campaign and I do not understand why because YOU could be the next victim.

    People are bound to get into irreversible indebtedness in this ongoing situation. The time for finger pointing is OVER. Either we are in this together as the Chancellor suggests (since he so often refers to 'we' I presume he means everyone).

    Unless someone in Guvt acts RIGHT NOW the trainwreck left in the wake of this economic storm will grow exponentially and I cannot see that the laws as they stand must remain in place either as a matter of principle or common sense.

    We are right on track for a two-tier country - those who 'came thru' and those whose lives were ruined. I cannot see what will be served by this other than the satisfaction of some wretched debt or other in the main to some financial institution who may well be one of the culprits that brought us to this place in the first instance.


  • Comment number 29.

    I am looking to buy a house (albeit a small 2 bed terraced house) in Torquay currently. Average prices are roughly £125000. Once purchased I will need a cooker, 3 piece suite, 2 beds, vacuum cleaner, washing machine, carpets, plus much more household goods. I will be paying a solicitor and staying in a hotel whilst down there. My total spend will be approximately £135000, which I have cash earning very little in savings accounts. My problem is should I wait for another year as property will probably lose 10 to 20 % saving me up to £27000 (my rent is £7000 per year). I suspect a lot of people are in similar circumstances and the economy is not going to improve until the housing market gets going again.

  • Comment number 30.

    The graph shows the mean of all recessions, which is fine for simplicities sake, but not all that helpful for prediction purposes.

    It would be more helpful to show the worst and best case scenarios - that would show the range of possibilities that we could expect

  • Comment number 31.

    Dear all,

    As a Dutch (the Netherlands) citizen I'm looking from the outside to the UK. And to be honoust I am worried sick. Our financial experts have been saying different things than yours, which leads me to conclude the guys in London are either brilliant or in denial. This is just a short overview:

    73% of UK GDP is in the service sector. London is the largest financial centre in the world. Larger than New York. Yet the economy behind it is relatively small compared to the two other mayor financial centres (New York and Tokyo), the UK is 5th largest in GDP nominal, and 6th largest in GDP PPP (in 2007). Yet due to the incredable fall of Sterling against all other mayor reserve currencies, the dollar, the Yen, the Swiss frank and the Euro, the UK GDP in 2009 will be reduced with 30%+. In other words the economy backing up the largest financial centre in the world will shrink to the size of the GDP of Spain. Even more dangerous than that, there is a real threat of importing inflation and eventually completely defaulting on the UK debt. UK manufactoring can not pop up over night. The stuff that is used by people in the UK therefore must be imported at least in the medium-long term. This in turn is now putting additional pressure on Sterling.

    Just to simplify, the UK is Iceland on steroids. Because the UK is bigger the drop of the highest card, in the house of cards, will take longer to hit the bottom. A 30%+ drop in value of Sterling up untill now means every citizen in the UK has lost 30% in the value of their savings. When you wake up now you own 30% less than just a couple of months ago. It is only due to long term contracts that inflation is not imported yet. The burden of the colapse of Sterling is now felt by the exporters. But when those contracts are re-negotiated it will happen. Please notice a 30%+ in a couple of months, that is just amazing.

    Here in the Netherlands we have simular problems due to our relatively large banking sector, but luckely we are now backed-up by a large chunk of the EU economy via the Euro. It came at the cost of giving up the oldest still existing currency (the Guilder), but looking at the UK now I'm happy we did it.

    I really hope those measures of your government help.
    Kind regards and all the best,

    Johan van den Heuvel

  • Comment number 32.


    Not as much fun? Part of the problem with the human race at the moment is that people in the west have a pretty screwy sense of fun. Their minds have been infected by the advertisers of shiny baubles (new cars, foreign holidays, houses & fittings etc.) You are clearly infected.

    You can have fun without spewing out vast amounts of CO2 to trash the place eventually. You should try it.

  • Comment number 33.

    #14 glenafon

    I spotted that also and was just about to post on it when I saw someone else here can read graphs also!

    The green line in totality 'looks' similar (she got that bit right), except it has just broken through the previous trend line i.e. it will now need to do a 'hard right turn' to get back on track and look like a 'normal recession'

    In order to do that the decline in the economy will need to slow down in pace very markedly.

    Is it just me or does anybody see any evidence of that.

    I am sorry Stepahnie but you have called this badly wrong, even your own graph you use as evidence can tell you that.

    I will watch your future braodcasts and posts with a keen interest.


  • Comment number 34.

    #31 johan

    Many 'real' people here who post on these sites (robert peston is the most established) have a similar view to you and your journalists as you communicated very well in your post.

    It is denial you are quite right.

    There are afew of us jumping up and down and shouting ' ICEBERG' but our voice is drowned out by those who can not accept the magnitude of this, particularly for the UK.

    One sobering thought for you though. i dont think the Euro is the saviour for the Dutch economy (or any euro economy) you may think.

    There is building pressure in some countires to unilaterally pull out of the euro. Countries like greece and ireland and Italy are suffering because they can not control thier own interest rates or allow their currency to de-value to provide some fiscal stimulus to their ailing economies that are underperforming much less than the euro average.

    I would not be surprised if we see quite abit of turmoil with the Euro. In principal it is fine when things are running well, but the bottom line is the countries are not politically aligned and if push comes to shove and a nation is really hurting and needs the currency to devalue or set interest rates to zero will its countries interests prevail or that of the euro do you think if a very difficult decision needs to be made?

    Just a thought.

    You will however be much better off than the Uk you are quite right. Wish us well., and good luck also.


  • Comment number 35.

    On the way down (as on the way up) we will see the classic positive feedback mechanisms at work: As house prices decline amidst distressed sales people will be extremely reluctant to buy, causing further inventory pressures on price. As this happens the value of the house as security to a bank diminishes and banks build this into their expectations.

    This makes remortgaging extremely difficult even for people with low loan-to-value on their houses, and consequently makes it hard to refinance unsecured debts and loans. This causes further defaults in credit cards, and makes other forms of debt harder to access.

    This in turn *enforces* a higher savings rate, and this reduces aggregate demand, which in turn reduces employment.

    The possibility of being fired also increases the marginal propensity to save (such as it is). There is, as is ever the case in an economy such as ours, a self-catalysing effect in the initial part of the downturn.

    As these factors emerge risk increases in corporate bonds, lowering their prices and increasing their yields. It also drops stock prices as profits lapse, and it impairs confidence in the value of debt-backed securities.

    The whole machine which produces the absurd excess in the first place functions in an identical fashion on the way down. Yet the government seems to think that if it gives the banks more money they will decide to take on what have become manifestly risky loans. If you believe in rational choice (and it usually isn't rational to), this hardly seems likely.

    Call me a pessimist. I think that until the consumer problem is tackled the car makers will still be unable to sell cars (as noone can pay for them), no matter how much money is given to them.

  • Comment number 36.

    Stephanie wrote :

    "The 2012 economy should also be more frugal"

    It is polite not to say I told you so, but your comments about 2012 look just like mine about the same year I made back in October last year (on Robert Peston's blog) for much the same reasons.

    (I even noted that the Olympics will become known as the Austerity Olympics. Don't build the village let the visiting athletes lodge with Londoners in 1948!)

    I have been trying to raise interest in examining what this new economy should/may look like, but to little avail as most still seem content to sling bricks at the people who caused the problem.

    I would be interested in peoples' opinions about my views on the need to return to 'sound money' when this is over.

    I contend that we will not be through this little difficulty until, and unless, borrowers have so organised themselves to expect to pay a reasonable cost to borrow and savers to expect to get a reasonable return. That is interest rate will have to go up to at least 5 to 8 percent in real terms. Without this necessary step, the use of money will remain inefficient and the bubble economy will simple re-inflate and by definition, we will not have recovered from the economic problem.

    Last autumn my models suggested that this may occur by 2014/2015 if all goes well - however dates have slipped as the real issues are still being avoided.

    Also, why is it economically and politically OK to pre-announce that VAT is going up again, but not to do so for interest rates?

  • Comment number 37.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 38.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 39.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 40.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 41.

    Two thoughts occur to me. One is the general concept that a boom/bubble economy is "fun". I guess it is if pointless competition with other fellow-sufferers through an unregulated housing market, rat-race insanity and obsessive outsourcing (all to prop up your giant mortgage) is your idea of "fun".

    The other thought is no.31: the largest part of RBS' losses this year was from buying ABN Amro: such a well-run European superbank that it was staggering with debt and mismanagement itself. Historically, the main reason that British (and more recently, mostly Scottish) banks ended up being Big in Europe, was because the locals wouldn't even service their own economies.

    And speaking of the Scots: where is Alex Salmond while two of his country's largest institutions go into meltdown? While the rescues of both HBoS and RBS are to support the British economy as a whole (and large parts of the european economy too), let's not forget that Scottish companies are inside the Scottish economy and subject to regulation by Scottish authorities.

    But then: they are the people whose parliament building went... how many times over budget?

  • Comment number 42.

    "As in the past, the sheer pace of the decline has taken everyone by surprise."

    No Stephanie, it seems to have taken you by surprise.

  • Comment number 43.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 44.

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  • Comment number 45.

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  • Comment number 46.

    The Glass-Stegal Act was introduced during the Great Depression to stop retail banks speculating their depositors cash on the stock markets.

    Bill Clinton foolishly repealed this act in the late 1990's and the rest is currently very bad history.

    What I would be interested in knowing is when is something like Glass Stegal going to be introduced here in the land-of-nod, because there does need to be a clear separation between investment, commercial and retail banks.

    The era of so-called 'universal' banks must draw to an abrupt close because bankers have fully demonstrated the limits to our trust in their activities.

  • Comment number 47.

    Johan, Johan. I was actually in a project with a pan-european bank when the Euro was brought in. I vividly remember footage of Dutch people complaining mightily that all of a sudden, things that had cost 1 guilder, suddenly cost 1 euro: so it may represent a theoretical advantage at the macro level, but then it immediatley translated into a very non-theoretical bit of punishment for the people affected.

    Who are we supposed to be satisfying here? Greenspan and Soros - or the people who actually earn and spend the money?

  • Comment number 48.

    #36 John from Hendon

    Ay good post, by the way.

    You ask what shape the "brave new world" ecomony will take.

    Well, in theory it ought to be a return to a model of stability: sustainable growth reflected by mid-range interest rates (5-6%), borrowing balanced by deposits and growth. Lower taxes, less bureaucracy, a smaller "state".

    However this model will never come about.

    Governments will never bite the hands that feed them and those are the hands that victimise the weak and distort the markets for excess profit.

    Stricter regulation and enforcement is undesirable and besides, markets canl always relocate to less regulated havens.

    Then there will always be someone willing to stretch the envelope of responsibility. While demand outstrips supply, there will always be pressure to squeeze that little bit extra than the next man.

    That's the problem. No matter how careful you are to manage your affairs wisely, there's always going to be someone prepared to step out a little further. Once one goes, everyone follows; e.g. fund performance is measured relatively - any fund managers who were wise and cautious during this last bubble would have been left behind in the bull run.

    In other words, boom and bust are here to stay.

    The reason many bricks are cast at those responsible is because of their denial of responsibility, that they (despite not seeing the crisis coming) still reckon they know best and because the measures being taken aren't leading us toward stability, but in the opposite direction.

    I think you're right that it could be 2014 (if ever, given the tax overhang created) before we return to some kind of normality - possibly another bubble.

    Personally, I fear the worst is yet to come.

    I believe we could drive our way out of this recession more quickly if we were to map out a course for the stability model outlined above.

    There remains the issue of toxic debt - still unquantified - who audits these banks? (Rhetorical question, I know full well). It still requires painful, even punitive, measures to deal with.

    Finally, and at risk of repeating myself, it's not about blind adherence to Keynes.

    The adoption of a Keynesian solution in the "New Deal" required a period of many years and ultimately only succeeded because the USA were able to trade upon their late entry into the Second World War. (There's no denying that the USA economy had two "very good" World Wars in the 20th Century).

    There's no "magic formula". Keynes succeeded because - like the sons of Issachar - he understood the times.

  • Comment number 49.

    # 1 - I agree with your analysis. Future growth will be constrained by resource shortages. In the case of oil, this will be exacerbated by the reduction in infrastructure spending by oil companies during the recession. Frankly, I don't see a solution to this short of reducing the world population by 90% and starting the whole process all over again.

    #28 - the politicians will argue that lenders need to have methods of collecting debt so that there is a moral hazard for borrowers who deafult. This It is however ironic in view of the bank bail outs. I think that the governement will try to avoid the two tier society that you mention by stoking inflation with a view to moving some of the pain from those in debt to those with assets.

  • Comment number 50.

    At about 6:24 am Today Radio 4's Today 26th Jan 2009 programme featured a list of steps to deal with the little banking difficulty, namely:

    1 suspend the shares
    2 reorganise then banks to essentially retail domestic banking and other

    This is exactly what I wrote on 22nd Jan 2009
    on Robert Peston's blog as my recommended list of actions.

    It is all very well and fine and dandy to listen to me now (and yes I know that others are saying the same thing!), but over a decade ago I wrote to both the Bank of England's Governor and the Treasury will my analysis of the problem and suggested a workable policy solution. They just ignored me. Events I am sorry to say have proved these 'self-proclaimed' experts wrong and me right. I am well aware that this is possibly an inevitable consequence of running a market economy, but nevertheless, I hope that many other people, other than me, are putting their minds and determination towards stopping these things happening again.

    My overriding concern now is the disconnect between the acknowledged medium term policy destinations and the short term panic measures that are being taken.

    I ask the question again: why is it not possible to pre-announce that interest rates in the medium term will run at a proper sustainable level of say 5- 8 percent?

    The advantage of this strategy is that long term borrowers, such as those taking out mortgages will have to budget on far higher interest rates than the present rates and will in consequence modify their behaviour. It will also reassure savers and investors.

    This strategy will allow the short term zero interest rates strategy to bail us out of the immediate panic (and perhaps shorten the Depression) whilst limiting and controlling the re-inflation of the unsustainable credit boom. It signals a return to policy sanity.

    PS Judging by previous performance (see above) I expect to see the Treasury letting this policy out at an off-the-record briefing in 4 days time!!!!!

  • Comment number 51.

    # 41 - the point you are missing is that the regulation of the Scottish banks is not a devloved power and therefore there is little of nothing that a Scottish government of any description could have done.

  • Comment number 52.

    I am going to be controversial. I do not believe that the mortgage market will come down to 3.5xsalary but 4.5x but with 15-20%. When I bought my first flat the rule was 3-3.5x and a 15% deposit but interest rates were 11% or more. If interest rates stay at under 7% on mortgages (or even under 5%) then banks will lend more because the risk is the same as when I borrowed. This implies that house prices will not fall as much as people think, 20-30% almost certainly but not 50%.

    If I am right then doom and gloom will not be as bad as many think.

    The service sector, particularly finance, legal and accountancy will rebound faster than expected but nothing like in the boom period. Sure the next 12 months are going to be very very bad but it is not a depression.

    Finally, there is nothing wrong with securitisation. It is a tool that can be used well or badly. UK got into securitisation in the mid 1990s (USA had been using for a while before then) and for 5 years it was an excellent means of structuring lending that was difficult to do anyother way or for divesting of risk. It went wrong in the last few years not because the tool is inherently wrong but because bankers got greedy, overleveraged it and rather than parcelling out risk in the interests of capital efficiency created new risks through leverage to increase fees. Securitisation, derivatives (which are not new financing instruments but actually ancient dating back 2000 years), credit insurance etc are simply tools. It is not the tools that got us into this mess but the workmen who used them

  • Comment number 53.

    It's quite funny reading all the posts from all the people getting competitive about how long ago they saw the recession coming! 1991 anyone? I think #3 John Monro is in the right ballpark, that the bigger underlying issue is resource constraint/peak oil and recession is a shorter term (though right now more impactful) story. FWIW I think however that this will be the last 'traditional' recession and we will climb out of it in a fairly 'normal' way - but the resource constrained world will hit during the upturn. Just for the record - that's Jan 2009, you heard it here first.

  • Comment number 54.

    I know that others have commented, but regarding the graph:

    The "classic" recession shows a big drop in the first quarter and then two quarters where GDP continues reducing but by incrementally smaller amounts until the turning point is reached.

    The green line shows an initial drop followed by an accelerating drop in the 2nd quarter. Your interpretation is that GDP drop should now level off in line with the "classic" curve, but a further drop (potentially even bigger than the 2nd quarter drop) is an equally valid extrapolation. This would also be in line with a country where financial services are a major part of GDP when the financial system is in meltdown.

    Will you be publishing an update of the graph once the next quarter's figures are available?

  • Comment number 55.


    Your premise is that interest rates will remain low, whereas I personally expect to see them rise up to the levels of the early 80s in order to either protect Sterling or try to dampen down the rampant inflation which will result from a continued fall in the pounds worth.

    Anyone who has borrowed 4.5x earnings will then be in a very poor situatuion. I expect that the banks will take a similarly jaundiced view when assessing the ability of new borrowers for the next 10 years.


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