The bubble in the UK has been as bad as it has been in the US, — if not worse. All of this is having the expected drag on the real economy. The headlines in the British press say it all:
House sales ‘collapse’ to lowest in 30 years, says RICS
The economic disaster will get worse
Fears of widespread job losses grow as unemployed figures rise sharply
Housebuilders come crashing down
The question now is where this is going and what he means for government.
The Prime Minister Gordon Brown is taking a lot of heat as he was the Chancellor of the Exchequer (Finance Minster) under Tony Blair for 10 years and has his fingerprints all over many of the economic policies now being blamed for an economic malaise. It would not be surprising to see him leave office before his term is up.
Then, there is the Bank of England (BoE). Mervyn King, the Bank’s head, had egg all over his face when he had to recant his anti-bailout stance as Northern Rock succumbed to the first bank run in the UK since the 1800s and had to be nationalised. The BoE’s credibility has been dented by the Northern Rock episode.
So, as inflation increases, one wonders whether the BoE has the gumption to increase interest rates even while the whole of the financial sector and home building industry is in a state. After all, the UK did experience much more severe inflation than the U.S. in the 1970s. The UK Retail Price index hit 24.1% in 1975 and 18.0% in 1980. The U.S. never came close to those numbers. Therefore, the BoE is more likely to hit the brakes than the Fed, in my opinion.
Ultimately, I believe the UK is headed for a very hard landing — much more severe than the early 1990s. I reckon it may be something on par with the recession after the oil shock in 1973. GDP contracted 1.5% in 1974 and 0.8% in 1975. On the whole, that type of outcome might be welcome for the increasingly pessimistic British consumer.
See also: Other posts under the label ‘UK.’