Even with the help of a radically devalued pound and three decades worth of hard-won structural reforms, the British economy is still well on course to be the worst performing of the EU and indeed of any major advanced economy this year.
The Government says the economy will shrink by 1 per cent; many economists put the loss at three times that. The downturn has spread far beyond the financial sector, housing and retail to almost every corner outside the public sector and agriculture. Notwithstanding the much-vaunted flexible labour market, unemployment will probably stand at 3 million by the end of the year. Falls in industrial output; a collapse in business and consumer confidence; even the pain in the car industry are all features that the UK shares with its European neighbours.
However, there are a couple of peculiarly British features that have made the recession more severe here than in other places. First, the extreme indebtedness of British consumers – both in mortgage and unsecured debts such as credit cards – is very high by international standards: £1.4 trillion, equating to about a year's GDP. Paying off that and then paying off the debts the Government is rapidly building up will take many years, and lead to a feeble recovery from 2010 onwards.
Second, the consequent credit crunch has been more severe than in most EU nations, and has made the challenge for the Treasury and the Bank of England in boosting the economy that much tougher.
Third, the UK's banks are comparatively large in relation to her GDP. Not, it is true, on the scale of Iceland, but these groups and the City of London's earnings dwarf other European centres. Most agree now that the UK neglected its manufacturing and ex-porting sectors. The "wealth creators" of the City have turned from figures of veneration to objects of hate. In terms of the role of the state, and attitudes to the market economy, the effects of the credit crunch in the UK will be felt long after the economy has recovered.
Perhaps the most violent deceleration of any European nation, with growth braking from the 7.1 and 6.3 per cent seen in 2006 and 2007, to a shrinkage of 2.2 per cent this year and 3.6 per cent last. Ireland was the first country in the eurozone to formally go into recession last September, and the "Celtic tiger" has at last been tamed, its humbling symbolised in the collapse of Waterford crystal and the loss of thousands of jobs at Dell's operations in Limerick. Of the two, Dell was by far the most significant. Dell had ranked as Ireland's largest exporter, and was responsible, remarkably, for 2 per cent of Ireland's gross domestic product in 2006, supporting a burgeoning network of hi-tech firms in Limerick and the rest of the west of Ireland.
Now analysts are even predicting that Ireland could once again become a net exporter of people, as she was when she was one of the poorest rather than the most prosperous nations in Europe; one research institute thinks 50,000 may leave next year. The construction sector led the boom and is leading the decline, with new building practically stopped dead, even in Dublin. A scandal at the Anglo-Irish Bank highlighted what has gone wrong in the sector, now being partially put right by a government-sponsored recapitalisation of the banks and a blanket guarantee for savers. Still, the gossip is that one more bank will probably go under before this deep recession, certainly one of the worst in the Republic's history, is over.
Germany's refusal to join in the Anglo-Saxon credit binge has brought little gain; a hangover without the fun of the party. Earlier signs that the eurozone's largest economy might have escaped the worst of the global slowdown have proved illusory. Although she was not herself a highly indebted nation, with a notably prudent approach by both consumers and the Berlin authorities keeping debt growth low, the fortunes of German industry were dependent on demand from highly indebted nations such as the US and UK, as well as exports of capital machinery to the Far East. The flow of BMWs to the UK (more than 100,000 in a good year) and machine tools to China provided plenty of work, even as the domestic economy was in the doldrums. Now Germany too is heading further into recession.
Analysts expect a huge rise in the number of unemployed to just fewer than 4 million by the end of the year, levels not seen since the war. Last week's news said it all: joblessness up for the first time in four years to 7.6 per cent, compared with the UK at 6 per cent; factory orders fell by 6.0 per cent in November; exports are experiencing their biggest dec-line in 40 years. The strong euro isn't helping this traditionally great trading nation, but Germany is suffering as a result of its reliance on exports, investment and manufacturing, which are the most cyclically volatile parts of an economy. Long-term German workers have to cope with low-cost competition from Eastern Europe and the Far East.
In response to the downturn, Angela Merkel's coalition government seems to have abandoned its previous public contempt for "crass" Keynesianism and is implementing or planning three government-funded rescue plans; a €50bn boost for the economy, a €500bn bailout of he banks and €100bn of emergency funding to companies affected by the credit crunch.
Most economists expect German GDP to fall by 1 to 2 per cent in 2009, but the most recent indicators suggest it could be worse than that. Even so, the odds are that it will be a little less miserable than the UK's showing.
The Italian economy has seen feeble growth in recent years, and the IMF says she is not due to see her economy rise by more than 1 per cent until 2012. Technically, she has been in recession since the middle of last year, but the reality is that few will have noticed the difference. In fact, Italy is in its fourth technical recession of the decade. The main problem is unemployment, and the fear that the current wave of lay-offs across industry will become permanent. Though the credit crunch is not as palpable in Italy as elsewhere, she has been unable to escape the general slowdown, and has been ill prepared for it. The giant Fiat combine – far bigger than even its car-making operations – still a major player in the Italian economy, has virtually closed down for an extended holiday. Other industries than banking have called on the state for help; the protracted process of privatising Alitalia will cost the Italian taxpayer more than €3bn in written-off debt. The number of layoffs across the country in December was up 528 per cent on last year, with the central Italian provinces of Lazio and Abruzzo the worst affected; everything from steel to textiles is showing signs of weakness.
Like Germany, Italy's exporters are suffering and dragging the economy as a whole further into recession. The odd mix of low-tech and high-luxury Italian products does not seem to have cushioned her from the slowdown. As in the UK, the traditional response to economic weakness was a depreciation of the currency. However, since the abolition of the lira and the adoption of the euro that option is no longer available, though the single currency is not especially unpopular at the moment. Longer term, a rapidly ageing population and sparing government debt may hold Italy back for many years to come.
Structural economic reforms seem as far away as ever, despite, or possibly because of, the return of Silvio Berlusconi (who enjoys especially strong support among some of Italy's most conservative, petit bourgeois economic interests). Most independent forecasters expect Italy's economy to have contracted by around 0.5 per cent in 2008 and to shrink by around 1 per cent this year.
In Ireland, it is the Poles; in Germany, the Turks; in Spain, it is the Peruvians – immigrant workers who helped during the boom and now find themselves squeezed out as the traditional workforce want "their" jobs back. Spanish workers are returning to the olive fields and care jobs they abandoned years ago as Spain's industrial revolution got going in earnest. Spanish unemployment is high by European standards: 3 million and above 10 per cent of the workforce, and the economy is shedding jobs at an alarming rate. The number of registered unemployed rose by 171,000 in November, after increasing by 192,000 the previous month.
Spanish industrial output plunged 15.1 per cent in November on a 12-month basis, the biggest drop for at least 15 years. Like Ireland, Spain enjoyed a long boom of inward investment from transnationals; now the jobs that migrated there from other, older European industrial powers are again heading away, this time east. Like so many European nations, the Spanish car industry, all foreign owned, has seen mass lay-offs and the fear is that Nissan, General Motors, VW Group and others will make the long seasonal holidays more permanent. Like Ireland, but unlike the UK, Spain's property bubble was accompanied by a huge increase in new building. All along the costas and in cities such as Madrid and Barcelona, the villas, offices and hotels were built, and now the slump has arrived.
One peculiarly Spanish feature is the reliance on guarantors to obtain mortgages. Friends and family members asked to stand by a mortgage debt in the good years regarded it as a mere formality. As in Britain and Ireland, the idea was that house prices could no longer rise. Having seen them fall, the banks prefer to ask the guarantors to pay up for mortgages in default rather than try to sell off devalued properties at auction. Thus are the savings and pension pots of many Spanish being confiscated by the banks, which seems an especially cruel way of doing business.
A little bon-bon in the third quarter – surprise growth of 01. per cent – seems unlikely to be repeated. The health of her famous car companies remains fundamental to that of her economy as a whole, and the brakes have been applied there with some rigour. Renault said yesterday that vehicle sales fell 28.5 per cent in December as the global economic crisis led to a "brutal" collapse of the market.
More widely, French industrial output continued its downward spiral in November, with a 2.4 per cent month on month decline, led by the motor industry, which bore an 8.1 per cent fall in production in November, following a 22.2 per cent decline in October. As in Germany, the strong euro has hit French exports badly, and the nation is heading for a record trade deficit in 2008; in the first 11 months of 2008, the deficit was €52.5bn, against €35.7bn in the same period in 2007.
But French industrial weakness cannot be entirely explained by the lagged impact of the strong euro. Slower demand in France's main markets (Germany, Italy, Spain) is taking its toll. President Sarkozy's government has been forced to slash its GDP growth forecasts for 2009 to 0.2 from 1 per cent and upped its deficit forecast to 3.1 per cent of GDP from 2.7 per cent.
President Sarkozy has shown that he is willing to spend his way out of recession, with a substantial fiscal boost to the economy approaching 2 per cent. Even so, unemployment is likely to climb beyond 8 per cent by the middle of next year, exacerbating a severe social problem as well; France's inability to find work for its young people, especially those from les banlieus, the poor and those descended from immigrants, especially the Muslim community. President Sarkozy's government has had only mixed success in pushing through its economic reform programme, especially on the labour market, and is likely to see the going get tougher as the economy slows.
The IMF is predicting a fall in GDP in 2009 of 0.5 per cent; even if it is a little worse than this, France will enjoy a relatively mild recession compared with her major EU partners.Reuse content