Wednesday, February 27, 2008

UK Recession Real Possibility

His (Gordon Brown's) long boom is now heading for a messy end with a slowing economy, rapidly weakening consumer and business confidence, a collapsing asset bubble in the housing market and a big hole in the budget.

So far these problems seem remote from most families. There is a feeling as on those late, sultry summer days where there is blue sky overhead and cricket is being played; but there are wickedly black clouds billowing up.

Until the rain falls the Government will not get a soaking. But wise people are looking for shelter.

A lot of pundits are positioning themselves to be wise after the event. But I have long warned Gordon Brown that unbalanced growth led by consumer spending based on borrowing was not sustainable because it did not reflect any underlying improvement in the fundamentals of productivity growth and innovation. I warned him of "record levels of personal debt which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level". That was five years ago.

Since then debt and house prices have inflated enormously to levels which, in relation to income, are now the most extreme in the developed world. The bubble is now bursting. Forward markets tell us that house prices are likely to fall 10pc on average this year. Serious people anticipate a 30pc to 40pc correction over the next few years.

The market has to correct itself. An adjustment may even be socially progressive if it restores affordability. The Government should certainly not acquire, as in the US, household mortgage liabilities. It already owns enough via Northern Rock. I worry about the pressure from mortgage lenders for a government bail-out in the form of state support for mortgage payments. There are, however, several sensible steps the Government can take

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