Economic Watchwords for 2010
Storms leave lots of damage; when patients have gone through severe trauma they are left with scars. Managers must live with what has happened, but also learn from it. From an economist’s perspective, what are we left with from this crisis? There will be quite a few scars, and lessons which emerge, almost too many to list here. Here are the top three:
The Importance of Debt
The biggest scar of all is debt– personal sector debt, corporate debt, but most importantly, government debt. There are two aspects to note; there is the annual UK borrowing which is heading towards 13% of GDP this year alone – around £178 billion borrowed by this government to balance the books. But of course that adds to the national debt, the gross public debt. And that is going to head upwards year by year, perhaps to 80% of GDP. That is not as bad as some countries such as Greece, Ireland and Italy, but it is bad by our standards. The debt overhang will take many years to pay back – and of course the interest on the debt has to serviced year by year, draining tax revenue away from government spending and investment projects!
The Fragility of Trust in Banking
There are other scars, too, and perhaps the biggest one is the damage that has been done to our trust in the banking sector. At this stage I can only guess how long that will take to recover, if ever. But it will be quite some time before the sector is appropriately restructured in order to restore the public’s faith and for bank lending to return to a semblance of normality.
The Effect of Fear of a Return to Crisis
This has been a financially driven crisis and, while in the UK we have technically come out of recession following the reported 0.3% growth in GDP for Q4 2009, there is a danger of a ‘double-dip’. So perhaps a third scar is the fear of a return of this crisis, with grave implications for consumer and business confidence and thus longer-term growth prospects.
The Watchwords for 2010
So lack of trust, fear and debt would be my top three priorities which will hang over us. And what are the watchwords for 2010? They are: caution, savings, debt reduction and hope! Such words do not spell good news for the UK economy. Recovery requires a sustained increase in spending by the consumer – the consumer is ‘king’! And while there are some tentative signs that the longest and deepest recession since the 1930s has come to an end, I still believe that this is a year for caution. Consumers and companies are understandably going to be very careful about how much they borrow and spend until they are confident that we are out of this recession and on a solid growth path, albeit at a modest pace. And that will not happen, I believe, until towards the end of 2010 - and, hopefully, 2011 will see us smiling again. Until then, keep your eyes open for potential hazards!
Professor Joe Nellis is the Professor of International Management Economics and the Director of the Policy, Strategy and Performance Community.