Review of the Year 2009: Economics

Recession, but no Depression

This year will probably be remembered for what did not happen, rather than for what did. The world did not, as it had seemed buttock-clenchingly possible a few months ago, slide into slump and a re-run of the Great Depression of the 1930s. Unemployment did rise, but not to the politically destabilising levels that had been dreaded; and the spike in world food prices eased, to the great relief of the world's poorest and hungriest. Phew.

So the Parisian banlieues did not burn, the sprawling shanty towns of Brazil and South Africa stayed quiet, and Ukraine did not see another revolution. There were riots during the G20 Summit in London in the spring, and loss of life, but the people did not take to the streets en masse to end capitalism and lynch the bankers. A hastily concocted tax on their bonuses, courtesy of the soporific, Alistair Darling was deemed sufficient punishment. Market economics and the City, though with less of the old swagger, survived. In other words, 2009 could have been much, much worse – for everyone.

It was still a record breaking year, and not in a nice way. Britain has had its worst single year, economically, since 1921; the economy will not return to the normal levels of output until 2011 at the earliest. Most, if not all, of the extra spending the Government has ploughed in to public services since 1997 will be wiped away in the next few years.

Although Britain has yet to go the way of Spain, Greece and Ireland and have its credit rating decisively demoted, the ratings agencies and the markets grew fidgety about the British government's debt habit as the year progressed and borrowing forecasts spiralled higher. The national debt will hit £1,000bn before long, and the Government will borrow £178bn this year alone. One pound in every four spent by the state is borrowed, and there is, as has been loudly pointed out to the Treasury and the Tories alike, little sign that either party is serious about putting things right. In any case, longer waits for operations, tattier schools, higher fares, cuts in public pay and pensions and tax hikes seem inevitable, whoever wins the next election.

Greece and Ireland endured austerity budgets by the end of 2009; few think the UK will see out 2010 without similar action. Meanwhile, Dubai, Mexico, Latvia, and Spain joined Iceland, Ukraine, Hungary and Pakistan in the poor house.

The world economy hit the bottom of its worst slump since the end of the Second World War, shrinking by about 1 per cent – around $600bn (£372bn) worth of lost output, enough to meet the developing economies' bill for coping with climate change for a year or two.

The UK has fared the recession better and worse than others in some respects. One of the major ironies of the recession is how blameless manufacturing companies around the world have suffered more than the eminently culpable banks. Toyota made its first loss and Japanese exports sank by 45 per cent, ultimately because of mortgage defaults in Florida. So our experience of the recession has not been as painful as those of Japan or Germany, which were hit harder by the collapse in world trade.

However, the UK is the only major advanced economy to remain mired in recession, contracting by almost 5 per cent by the time growth is predicted to return in the New Year. We've lost £75bn in output, or twice the national schools budget.

Unemployment rose, though by less than expected, to reach 15-year highs: 2.5 million out of work, a million of them young people. New Labour, its critics argue, is creating its very own "lost generation", just as Margaret Thatcher did before them. Only the depressed state of wages and – outside the Post Office, the London Underground and British Airways – co-operative industrial relations prevented more idleness and strife.

On the plus side, the Bank of England cut interest rates to their lowest level since the Bank's foundation in 1694: to 0.5 per cent. Home owners with tracker mortgages were especially fortunate, though they seemed keen to pay off the debts they accumulated during the boom, rather than spend their windfalls.

So much for the numbers. But why did things not turn out as the doom mongers forecast? What went right? "It worked." Bullet point number six in the Pittsburgh G20 Summit communiqué in September is probably the shortest sentence in the history of diplomacy. It pretty much summed up what went right for the world economy in 2009 – $5,000bn (£3,010bn) of fiscal support from the world's largest and fastest growing economies. Plus rescues of the world's banks – running to close to £1,000bn-worth of taxpayer exposure to loss in the UK alone. As well as that new, ungainly, but immensely powerful little phrase we met in 2009: "quantitative easing". When lowering the price of money – the interest rates – is not enough to get an economy moving, the answer is simply to inject extra quantities of money into it instead, a sort of adrenaline boost. How much? Try £200bn, the current value of the "QE" programme the Bank of England launched to a startled public in March. Critics fret about the eventual return of inflation as the easiest way for Governments to rid themselves of their outsize debts; but for now the G20's admittedly self-satisfied verdict on its own performance stands: "Our forceful response helped stop the dangerous, sharp decline in global activity and stabilised the financial markets."

Janus-like, at the beginning of 2009 the world peered over the brink of a 1930s-style collapse but can look forwards, glimpsing recovery. But what will hold us back is all-too visible. The credit crunch persists, the banks still aren't lending, especially to smaller businesses and first-time buyers. The body economic is still on life support. Arguably, the entire credit system, as well as some of the biggest banks, has in effect been nationalised. To the intense irritation of many, there are still banks deemed "too big to fail" yet backed by implicit government guarantee (and keen to pay their staff obscene bonuses, taxed or not). The public and private debt overhang across the Western economies – especially heavy in the UK, Ireland, the US and Australia – promises to stunt growth for many years, or even decades.

Yet for some there was no recession in 2009. The breakneck pace in China and India slowed, but their economies still grew more than twice as fast as America or Europe did in the best of the good times, and that outperformance will intensify. That will spawn geopolitical as well as purely economic consequences.

The world crawling out from under this recession is very different from the one that entered it: the US is enfeebled, the dollar threatened with being ousted from its long status as the world's reserve currency (a story broken in this newspaper), Europe is sclerotic, Japan is stranded in deflation. Economic power has shifted eastwards again, symbolised by the rise of the G20. That has been the story of the past year, of the past decade and, we may be assured, of the next decade too.

And the real losers were...

It will go down as the year that we all lost out. Savings rates shrunk, mortgages became almost impossible to get, and loan rates climbed. Meanwhile, investment prospects proved harder than ever to predict, pension pay-outs proved paltry and energy bills soared. Adding to the misery, insurance costs went up and the banks won the court case against people complaining against excessive overdraft charges.

It was a wallet-lightening 12 months with little to cheer ahead. Of course, there were some winners. House prices recovered – mainly in sought-after areas – while anyone who correctly timed their investment in the stock market could have doubled their money.

The year began with record low interest rates, with the base rate sinking to 0.5 per cent in March. Only six months earlier, the base rate had stood at 5 per cent. The move by the Bank of England left savers getting pathetic returns on their accounts. At the same time, borrowers with fixed-rate mortgages were trapped on long-term deals with expensive get-out clauses. But the sustained period of low rates left people with tracker or variable-rate home loans on much cheaper mortgage payments.

The bank charges court case rumbled on throughout the year with an estimated six million people hoping to claw back cash from banks. Anyone hoping for compensation was left with nothing after the court case undertaken by the Office of Fair Trading to test the fairness of the charges was thrown out by the Supreme Court in November. However, the two and a half year-long case still looks likely to be good news. Because the banks themselves expected to lose they spent much of the year preparing more-competitive current accounts.

Clever investors had a fantastic year – provided they bought into stock markets in March. But many simply fled from equity investments after a turbulent 2008, leaving their cash in low-paying savings. Even more sadly, the share rally since March has encouraged many private investors to return to the stock market, probably too late to profit, but just in time for the double dip that has been predicted.

The increase in the amount you can salt away in a tax-free Individual Savings Account to £10,200 in October prompted a flood of new money into ISAs. But only from the over-50s: the rest of us have to wait until April 2010 to benefit from the tax-free deal. Borrowers were not so fortunate: average credit card rates climbed during the year while the number of 0 per cent deals fell to single figures.

Home owners have been hit by high fuel bills – despite wholesale energy costs slumping – while floods ravaged the country again during the year, leaving those in flood risk areas looking at huge increases in their home insurance premiums. Motorists, too, have faced more expensive cover as accident-related personal injuries claims soared, which bumped up premiums. Simon Read

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