From the below, it sure looks as if the UK economic situation resembles that of the US approximately a year ago: Gordon, the fall guy If the economy does nosedive, it will take Brown's prospects with it Special report: global recession Larry Elliott and Charlotte Denny Thursday July 26, 2001 The Guardian The British economy is about to arrive at reality checkpoint. America is barely growing. Japan is a basket case. Europe is sclerotic. Argentina is about to go bust. Turkey is threatening to implode. The G8 says Africa needs a Marshall plan. But in the UK unemployment is falling, inflation is subdued and there is money in the kitty to spend billions extra on schools and hospitals. This state of affairs cannot last. The theory of globalisation argues that we are all much more interconnected now, all far more susceptible to the chain reaction that can set in quickly if one country starts to suffer. When the bursting of the dot.com bubble prompted a rapid downturn in the US a little over a year ago, it was seen as a no-brainer that Britain would be one of the first countries to share the pain. It hasn't quite happened that way. Europe, which hoped it would be immune from the US slowdown, has been affected far more than the UK. But the litany of bad news from the corporate sector, the precipitous fall in recruitment advertising, the collapse in manufacturing are all strong evidence that Britain is facing its most serious economic problems since the recession of the early 1990s. The ramifications - both political and economic - if the UK does hit the buffers will be profound. Listen to any government minister, particularly Gordon Brown, and they will say that there is good reason why Britain has so far been able to ride out the global downturn: the expert way in which Labour has managed the economy since 1997, with its tough rules for the conduct of fiscal policy and control of interest rates handed to the Bank of England. But there is another explanation for the seemingly robust health of the British economy up until now: the willingness of the great British shopper to carry on spending regardless. It has been the jangling of tills in the shopping malls that has kept the economy afloat in the face of the sharpest decline in manufacturing output since the last recession. The strength of the pound has meant UK firms have been cutting prices in order to minimise the loss of overseas markets, but the latest snapshot of the sector shows that exporters are at their most pessimistic since the Asian crisis. Profits are being squeezed, investment is being cut, the trade gap is widening. The traditional weakness of the British economy - the tendency for consumption to outstrip production - has been particularly pronounced, with the trade deficit acting as a brake on growth in each of the past six years. On the surface, however, things appear to be going well. The strength of the pound has made imports cheaper, keeping inflation in check while encouraging higher consumer spending. Although manufacturing firms have been shedding jobs, service-sector firms catering to the consumer have been creating them at an even faster rate. Unemployment, on the narrowest claimant count measure, has continued to fall and now stands below 1m, its lowest level for 25 years. Mr Brown's claim that he has abolished "boom and bust" is nevertheless looking increasingly premature, even presumptuous. We actually have boom and bust at the same time. The UK has been living on borrowed time and the period ahead could get very tough indeed. Earlier this week the Item club, a group of City economists who use the Treasury model for their forecasts, warned that unless the pound falls, unemployment will start to rise - and, if that happens, "the housing market and the high street will follow the rest of the economy into recession". The chances of this happening are much higher than the government would have us believe. Britain flirted with recession during the Asian financial crisis of 1997-8, but prompt action by the Bank of England and the rapid recovery in the US meant trouble was narrowly averted. This time the international backdrop is much gloomier, so whereas last year the over-valuation of sterling was masked by buoyant world trade, this year is on course to be the weakest year for trade since the aftermath of the first oil shock in the mid-70s. Moreover, the Bank's ability to slash interest rates is limited by its concern that cheaper borrowing would merely stimulate another consumer spending binge. So what would happen if the economy really did tank? First, the foreign-exchange markets would lose confidence in the British "miracle", and shift their speculative flows out of London. A sharp fall in the value of sterling would - at a time of near full employment - almost certainly push up prices, forcing the Bank to raise rates. The economy would then experience a mild form of stagflation - low growth and higher inflation. Second, a prolonged period of sub-par growth would make it much harder for Labour to deliver on its big election promise - to improve the standard of Britain's public services. There is enough money to pay for the current three-year spending programme, which lasts until 2003-4. After that, the government needs the economy to grow briskly to keep spending at the current rates - or else be willing to raise taxes. The Item club is forecasting growth of 1.8% this year and 2% next - not high enough to fund Labour's ambitious goals of turning round the public services. Third, recession could alter the public debate about joining the single currency. For the moment, Germany, the key economy in the eurozone, is doing worse than Britain, which means few would wish that the inflation-obsessed hawks at the European central bank were setting UK interest rates. But should a severe downturn here be accompanied by strong growth in the eurozone, coupled with a recovery in the euro, the mood could change. Fourth, the end of the golden economic weather would also alter Labour's political fortunes. An unenthusiastic electorate voted it back in large part because it had done a good job of managing the economy. Like Conservative governments in the past, Labour was respected, if not especially loved. But as the previous government discovered, nothing evaporates quite so quickly as a government's reputation for economic competence - and once lost, that reputation is devilishly difficult to win back. Finally, there is a personal dimension. The strength of the economy and the political power wielded by Brown have become inextricably linked. As with Nigel Lawson in the 80s, the chancellor could pay a heavy political price if the economy starts to become a negative for Labour. Lawson was seen as a colossus in his golden period between 1983 and 1987; someone who set the tone for Thatcherism and gave the government its intellectual underpinning. The same, with knobs on, goes for Brown. To the unconcealed envy of some of his cabinet colleagues, he has extended the reach of the Treasury across the whole of Whitehall, using his obsession with improving Britain's productivity record to park his tanks on the lawns of his senior colleagues. In an economic crisis, he would find his tanks rolled back and ministers tripping over each other to lead the counter-offensive. It would be a sad fate for a man who has already seen the top job snatched from him once if an economic downturn were to end his ambitions for ever. Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
