The illusory division in the British economy

April 4th, 2008

I have been reading with interest this week about a growing divide in the British economy. For once this is not the growing gap between rich and poor or the financial divide between the north and south, but between the calamitous economic conditions in the City of London, and the relatively peaceful conditions in the surrounding ‘real’ economy.

The assumption of this seems to be that the City boys can be left to suffer in conditions of their own making while the rest of us carry on almost as usual.

The Bank of England Governor lent some credence to this view last week, pointing to the “remarkable resilience”, so far at least, of consumer spending and employment, and agreeing there is a sharp division of economic experience between the City and the real economy.

Unfortunately, the idea that the financial world and the real economy can exist in separate orbits, with little influence on each other, is a forlorn hope. Indeed, events in the past week have made it all too clear that these two worlds now threaten to collide with potentially explosive results, and severe fallout for all of us.

The intensity of the influence of the financial and “real world” spheres on each other was underlined by Friday’s report from Nationwide Building Society of a fifth consecutive monthly fall in house prices.

With outright year-on-year falls in house prices set to become grim reality as soon as next month, and the likelihood that the credit crunch will mean that home loans become scarcer and still more costly, these events raised the threat that Britain could be gripped by a vicious circle similar to that afflicting America.

Negative developments in financial markets and the real economy now threaten to feed on each other, with falling house prices battering property market sentiment, cutting demand and making lenders still more cautious, depressing house prices yet further. The downward spiral risks being intensified as a housing slump then saps consumer spending, weakening growth, imperilling jobs and adding to strains on institutions as more borrowers default.

The stark reality is that far from being somehow separate and distinct, the fates of Britain’s financial sector and the real economy have been, and remain, intimately bound up.

British households’ savings rate last year plunged to just 2.9 per cent of incomes, the lowest since 1959, while companies have now blown the big cash piles built early this decade. Repayment costs on borrowings for both households and companies are now the highest since the early 1990s.

Years of financial sector largesse have left the rest of us deep in the red, and both the financial world and the real economy are now deeply, and similarly, vulnerable as a result.

This entry was posted on Friday, April 4th, 2008 at 3:14 pm and is filed under Personal Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

The illusory division in the British economy

Leave a Reply