Commentary: Debts cast a long shadow

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The EC Commission predicts that the British economy will grow by 1.5 per cent this year, which is not impossible but is on the high side of the consensus forecast of 1 per cent. More plausible still is the view of Christopher Dow, the former Bank of England economics director, who has called this recession better than any other analyst producing a regular commentary.

Mr Dow's latest circular from Leopold Joseph & Sons foresees that the present state of stagnation may persist this year and even a year or two after. Furthermore, if any continued growth in capacity is taking place, stagnant demand will produce rising unemployment and growing unemployed capacity. 'At some point,' Mr Dow writes, 'that could produce an outright downturn.'

The essential reason for this pessimism is the overhang of debt, a longstanding theme of this column. Mr Dow points out that even the sharp rise in savings has not been enough to reduce personal debt relative to national income, though it has now stabilised. If consumers had continued to grow richer at the rate of the late Eighties, they might now be some 10 per cent better off. This may be one measure of how much they might want to reduce their debt before spending freely again.

Nor is it the most pessimistic. If consumers take account of their wealth, they could whip themselves into an even worse state of anxiety. More than a million home owners now owe more than the value of the house. We are not so much a home-owning democracy as a debt-owing one.