Five years have passed since it was declared that Britain’s financial status was considered anything but great. Whether this can be attributed to economic stagnation or the crisis in the Eurozone is up for debate.
The crisis afflicting our European counterparts has been compared to a slow-motion train crash. My view paints a less accelerated picture – I would describe it as a freeze frame. The situation in the Eurozone has remained fairly static for the past few years, which begs the question, why do so many people assume our whole economic future depends on what happens in Europe?
It seems that we are frozen in crisis mode at the moment. Sir Mervyn King recently highlighted two obvious things about our economic situation. The first, and one that is a surprise to everyone, is that five years later we still haven’t succeeded in burying the financial crisis of 2008/9. And the second point, that pessimism is the general consensus, is tangible.
The double-dip recession was supposed to be a nightmare scenario, and one that we were keen to avoid. Presented with the figures that confirmed the worst, there was still a reluctance to accept that we were now living the nightmare. These figures are a further kick in the teeth for economic confidence, with fear slowly taking over. The current situation in both Italy and Spain is testament to this. As fear over their ability to pay back their debts increases, so do the yields on the bonds covering the potential risk. Currently standing at 7%, this is unsustainable, and in equivalent terms, it’s like taking out a credit card to pay your mortgage.
Lending has also fallen victim of consumer perceptions. A lack of confidence has reduced consumers’ desire to borrow – the general consensus that banks don’t want to lend is slowly being disproved. But regardless of whether the banks win this argument, housing transactions are continuing to fall, and they are already at their lowest level.
Measures have been put in place to try to restore this confidence, but so far they don’t appear to have had much success. Budget cuts have so far failed to reduce the deficit, and as of yet the only positive thing to come out of this is the willingness of international markets to lend us money at a more favourable rate. But we don’t want to borrow money, we want to do the opposite, which is the way to get the country thriving again.
Sir Meryvn’s sombre outlook has us all imagining the worst. But there are ironies that suggest the Governor may well have practised his poker face. In the same week that he spelled doom and gloom for the economy, unemployment fell by 50,000 and inflation was sitting within the Bank of England’s target for the first time in years. Additionally, oil prices started to come down, and it is anticipated this may continue as energy companies showed reluctance in locking into existing prices. And surprisingly, a 3% rise in private sector wages has gone unreported. That’s higher than the rate of inflation, something we haven’t seen in years and is cause for celebration. Unemployment levels are reducing, house repossessions are far lower than expected, and the squeeze on living standards is starting to relinquish its grip.
From a corporate perspective, things are also looking good. Wage costs have been below inflation for a sustained period of time, which has had huge benefits for the sector. But they could be doing more. By spending some of the £754 billion (half the value of the economy), corporations could get us out of recession. So, why the reluctance to spend? The fear of a lack of return on investment means that companies are mirroring households in their ethos of battening down the hatches. I can understand why corporations are doing this, but in real terms, the value of their money is shrinking, which is dealing another blow to economic recovery.
To make a full recovery, the economy depends on confidence, which has depleted in supply. This is something money can’t buy, and despite the billions of pounds invested in the Eurozone, confidence is far from palpable. One reason for this lies with many of the optimists, who have in recent years, been proved wrong. This has done little to restore faith.
So what does this all mean for our situation now? Are we so preoccupied with potential doom that we are unwilling to take a risk, even if there is promise of a reward? Rather than learning from our previous mistakes, we seem crippled by them. If this level of fear continues, you may well be reading something very similar from me in another five years.