Debt and housing slowdown threaten...

Britain's time bomb economy

THE EXTREME volatility in the world's stock markets has not yet led to London city slickers jumping off skyscrapers. But growing fears about the underlying health of the economy prompted one commentator to claim that a forthcoming US recession will be deeper than any since before 1945, while another screamed about a global 'pandemic'.

Robin Clapp

The world economy has reached a decisive turning point. A full-blown recession in the US will have a contagious effect across borders, leading to job losses and falling living standards for millions.

The British economy is particularly exposed to these chill winds, notwithstanding Gordon Brown's assertion that 61 consecutive quarters of growth will insulate Britain. As if anticipating Brown, Karl Marx once remarked "Business is always thoroughly sound and the campaign in full swing, until the collapse suddenly overcomes them".

British capitalism has turned itself into a casino, becoming crushingly dependent on speculation, private equity deals and reckless attitudes towards debt. New Labour's role has been little more than to act as cheer leader for the City's financial orgy.

Debt and housing time bomb, cartoon by The Socialist newspaper

Financial services have expanded much faster than the economy as a whole, while manufacturing has continued to flounder. Between 2003 and 2006, finance made up 9.4% of the economy, yet was responsible for 30% of overall GDP growth.

London's foreign exchange markets now account for twice New York's share of trading and last year hosted the most new share issues. The City is therefore very exposed to the credit crunch.

The Northern Rock bank debacle is an illustration of this. Through using the apparently very clever, but now vilified financial instruments thought up in the last decade to artificially expand credit through bundling up and repackaging debt, the owners managed to create Britain's first major run on a bank since the nineteenth century.

Subsequently its bailing out has cost the taxpayer over £54 billion in loans and guarantees. Its future is uncertain, but as the Financial Times' Martin Wolf observed: "No industry has a comparable talent for privatising gains and socialising losses".

Britain has its own subprime time bomb. Credit has been loosened so much that almost 55% of borrowers are using more than 50% of their pre-tax income to service debt - a doubling since the last slowdown. Average household debt, including mortgages, now stands at £56,234 and average personal debt grew by almost 10% last year.

The housing

market faces a series of perils, with 60% of Britain's total wealth now tied up in property of one form or another. Rocketing house prices since 2000 have caused misery for people trying to get on and stay on the housing ladder, but huge bonanzas for the lenders.

But now undisguised panic exists in the commercial property fund market where prices are plunging as a result of rising costs because of the credit crunch. Office prices fell by 4.7% in December, the biggest monthly fall for 20 years.

The buy-to-let sector, accounting for 8% of all mortgages, is also very vulnerable.

With house prices falling, buy-to-let is becoming unattractive unless investors can expect sharply rising rents. Already investors are dumping properties back on to the market in order to secure first-mover advantage.

Britain may not be so different from the US in relation to its exposure to domestic housing contraction. For some time the British property market has looked like a bubble, felt like a bubble and smelt like a bubble.

The homes slowdown could turn into a crash that will impact across the economy. Three months of house price falls have already dented confidence and further falls are expected.

Previous housing booms have all ended with prices plummeting by 30% in real terms. A repeat would spell disaster for those whose borrowing is tied to their house's value. The Royal Institution of Chartered Surveyors warns that 123 people are set to lose their homes every day.

Added to this toxic mixture are a current account deficit that, relative to the size of the economy, is the biggest for 50 years and a budget deficit that swelled to £28 billion in December.

Little wonder then that capitalists are so gloomy and that the FTSE share index has been reflecting concerns about the spreading of stagnation onto the High Street, following poor Christmas sales figures.

Even before unemployment begins to rise significantly, new figures reveal that relative poverty has grown for the first time since Labour took power in 1997, with 12.7 million people living in households with incomes lower than 60% of the median after housing costs.

One fund manager, ruefully looking back at the 'successes' of globalisation over the last decade, conceded last week that "If you have a rampant capitalist state and do not redistribute it at all, you get rich ghettos and ultimately revolution."