The Economy - where do we go from here?

Last week was probably one of the worst in living memory for the UK economy.

While one government minister was seeing mirages of green shoots, the rest of the country was being battered by economic statistics that indicated the depth of our economic problems.

An economic survey from the British Chambers of Commerce showed that key indicators in both the manufacturing and service sectors had recently plunged to record lows, leading to predictions that the recession would be “worse than the early 1990s”.

Although the decrease in the value of the pound has made exporting more attractive, the bad news is that the slump in manufacturing is accelerating, with output plummeting at its fastest annual rate since 1981.

According to official statistics, manufacturing output fell by 2.9% in November 2008, the steepest monthly fall since June 1985 and, more tellingly, the trade gap with countries outside the European Union widened to £5.3bn in November, the worst performance on record.

Other sectors have also suffered. Despite the cut in the rate of VAT and pre-Christmas sales, UK retailers suffered their worst month on record in December, according to the British Retail Consortium (BRC). In addition, a study by the CBI and the accountants PWC showed that the profitability and income of financial services firms fell at a record rate in the last quarter of 2008.
As many have predicted, those that had resisted job cuts before the holiday season are now letting their employees go as prospects for the economy worsen.

Top of the list is Barclays Bank with 4,200 jobs being lost, followed by other financial firms including the Spanish bank Santander (owner of Abbey, Alliance & Leicester and Bradford & Bingley), which is cutting 1,900 and Cattles – the loan company, which is losing 1,000 employees due to the effects of the credit crunch.

However, it is not only financial services which are being hit hard. In manufacturing, Jaguar Land Rover is shedding 450 workers and JCB is losing around 700 jobs. Well-known names such as Waterford Wedgwood and Findus have gone into administration, with 780 going immediately. In retailing, Land of Leather also called in the receivers, threatening 1,060 jobs, while bookseller Waterstone’s,cut 200 jobs. Zavvi, the DVD and games retailer, has lost 353 jobs with the closure of 18 UK stores last weeks.

Most worrying is that, contrary to initial predictions, the public sector is also beginning to be hit hard by the recession. According to the Local Government Association, one in seven councils have recently axed jobs and about 40 councils said they were planning some 7,000 redundancies.

That is the current situation in the UK economy but what about the immediate future? Some of the statistics paint a grim story. For example, according to Ernst and Young, the number of profit warnings by UK-listed companies hit a seven-year high in 2008 and the accountants predicted that the situation in 2009 would probably be just as bad, if not worse.

Some forecasters – such as the National Institute of Economic and Social Research (NIESR) – believe that the UK economy is already deep into recession, and is heading for the worst downturn seen in any advanced economy since the Second World War.

The question for many is whether the UK economy can batten down the hatches and survive this economic storm of the century? Certainly, with unemployment always being the last indicator to grow within a recession, the spectre of having three million workers without jobs by the end of this year is a frightening prospect.

With politicians unsure what to do next, some are arguing that the £20bn of loans being offered by the UK Government is too little and too late.

Indeed, as the recent job losses show, many firms have already decided to make employees redundant as the only option for survival as banks bleed them of cash.

Given the disastrous statistics that emerged last week and will continue to emerge over the next few months, one can only hope, rather than expect, for banks to finally get money out to the business community and for the whole commercial system to kick-start itself into activity once more.

Let us pray that it does happen as, short of printing more money, this is probably the last throw of the dice for the current Government and may be the only financial instrument that is able to save the UK economy from a prolonged recession.

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