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A look back at the future
Now that all the dissections of the last year's economy are over it is perhaps a good time to speculate on what we might be writing at the end of 2009. We are in dangerous times, no question, although my own view on the prospects for this are probably at the upper end of general expectations. And of course, things could go wrong though, horribly wrong. So, taking a deep breath, let us start with a pessimistic projection the worst case scenario review of 2009 might look like:
2009 review: worst case scenario
Well 2009 really was the year that changed the world. In January the Bank of England, (BoE) in a desperate attempt to boost the economy, cut interest rates to just one half of a percent. This was its lowest level since the bank was formed in 1692.
Regrettably the move backfired as savers found themselves effectively being punished for saving and moved their funds offshore to seek better returns. Such investments required long-term deposits and therefore consumer spending was choked off. Meanwhile the banks consistently opted against passing on the lower rates to consumers - which set them on a collision course with the Government. First to feel the wrath of the Government was Royal Bank of Scotland, which was fully nationalised in March. However taking control of this bank alone was insufficient to restore the much needed fluidity to the credit system. Many analysts now speculate that perhaps all of the banks should have been nationalised at that juncture. As it was, a further six months passed before employees at Barclays and Lloyds TSB found themselves working for the Government.
The closure of thousands of bank branches added to the gloom on the High Street, which already had many stores standing empty following the collapse of Woolworths, Adams et al. Looking back, perhaps the Government should have come to the aid of Woolies. Why so? Well, much like the fall of Lehman Brothers in the banking sector, the demise of Woolworths was the event that caused the rest of the retail industry to take fright - which quickly snowballed into panic.
Over the course of the year, one fifth of Britain's small businesses were wiped out, throwing two million extra people on to the dole queue. The Government's New Deal for the unemployed has barely dented the spiralling numbers of those out of work. Hard pressed consumers are now being squeezed harder by rising inflation as a result of the £ being worth only 80% of the Euro. Of course this did help exports for what remains of our manufacturing base, with UK produced goods far cheaper (and thus more popular) than their continental rivals. And while only the very wealthy now travel abroad, hopes are high for a boom in foreign tourists visiting the UK in 2010.
So, this was the year that saw the pound sink to its lowest level ever, the Labour Government nationalise the banks with Tory support and worst of all saw an extra 2.5million join the dole queue.
Or perhaps we might be reading this:
2009 review: slightly more positive
The year began with the bitter winter cold reflecting the economic climate. But this was always a recession created by the banks and they were finally compelled to take action. The key turning point was when the nationalised Northern Rock was instructed by the Government to reverse its policy of running down its loan book and started lending to home buyers again.
Many senior executives had to be fired before this could take place but it set the scene for the easing of the credit crunch. Royal Bank of Scotland, itself nationalised fully later in the year, also started to lend its hoarded cash. Other banks, fearing the same fate, raised their game and slowly the freeze on credit began to thaw. By the Spring the stock market had started to recover heralding that the end of the recession was in fact in sight.
And so it was. For the final quarter of 2009 the economy again began to grow. Although at a meagre 0.1% the psychological effect of that was enormous. All the old Woolies stores had been snapped up by a retail sector growing in restored confidence. Most of Woolies' dedicated and well trained staff ended up recruited by those stores' new owners.
Nevertheless an extra half million people are now on the dole compared with 2008 - although this number is expected to fall. The low pound at the start of the year gave a very welcome boost to our exporters and has created a tourist boom that we have not seen for many a year. With Government sponsored advertising abroad the tills in our shops and hotels have been ringing merrily in accepting the euros, dollars and yen. This may not last as the pound has now recovered and interest rates are on the rise again - much to the delight of would-be savers.
The crisis is now over and we must all hope that the mistakes that lead to and exacerbated this recession must never be made again. A new Office for Responsible Debt will ensure that the banks are not so reckless and will control consumer debt by controlling credit cards and mortgage lending more carefully.
It will take many years for unemployment to fall to its pre-2008 levels - but it will fall. House prices are never likely to boom in the crazy way that they have done in the past. This was a major contributor to this recession and was the primary cause of the last one. If governments and lenders have learned this lesson once and for all then maybe, just maybe, this whole painful recession will have been worth it.
As to which of these two scenarios is most likely to resemble reality in the 12 months of course only time will tell. But with a bit of perspective, a lot of determination, some timely intervention and a lot less blind panic then maybe it won't be quite as scary as it currently looks.
