http://seekingalpha.com/article/121207-is-u-k-headed-for-an-even-worse-great-depression-part-1-of-3
Is U.K. Headed for an Even Worse Great Depression?
The purpose of this analysis is to map out the trend of the UK recession for 2009 and 2010 in terms of depth, the bottom and the potential recovery. The most recently released GDP data shows that the UK economy actually did fall off of the edge of a cliff during the fourth quarter of 2008 by contracting by a shocking 1.5% GDP. This compares against the government's recent forecast for 2% GDP contraction for the whole of 2009, which paints a picture of gross under estimation of the actual extent of economic contraction that is taking place at this time. Hence the adoption of the easy going terminology of "Quantative Easing" to hide the truth of money-printing on a scale that could bankrupt Britain. The evidence of this has been played out in the currency markets with sterling's fall to a 23 year low against the dollar, a fall of over 30% in barely 6 months.
The fourth quarter GDP crash of 1.5% is far higher than expected and explains why the government panicked, as evident by the deep interest rate cuts from 5% to 1% in just 4 months. The rate cuts are in addition to the £1 trillion banking sector bailout liabilities. The rate of contraction at 1.5% per quarter implies an annualised collapse in the UK economy of 6% which would amount to loss of national income of £72 billion, against which the government has so far committed £40 billion in the form of tax cuts, industry support and stimulus packages. However, the deviation from the trend of 2.5% growth per annum puts the gap at an additional £30 billion per annum.
The £1 trillion committed towards halting the banking sector's collapse on face value seems like a huge amount that should kick start lending, however this should be set against contraction of an estimated 30% of the UK credit market or £1.2 trillion. Distressed foreign banks pulled the plug on UK operations, on top of which we have had housing market deflation of £250 billion, and stock portfolios erasing a further £400 billion, which sets the £1 trillion of injections and liabilities against deflation of an estimated £1.85 trillion.
The recession looks set to run throughout 2009, with the consensus view that the recession will be the worst since the Great Depression of the 1930's during which time the UK economy contracted by 10%. The question now being raised is whether Britain is heading for its own Great Depression on a scale worse than that of the 1930's ?
Britain's Great Depression of the 1930's
Britain's GDP during the 1930's Great Depression fell by 10%, which on face value compares favourably against that of the United States that saw GDP contract by 30%. However, unlike the United States, Britain did NOT boom during the 1920's. On the contrary, the 1920's was a period of stagnation that started out with the Depression of 1918 to 1921 that saw GDP fall by 25%. Therefore, Britain's Great Depression in fact started in 1918 and did not end until 1937 and therefore lasted nearly 20 years. However in today's economy, Britain is coming off of a 10 year+ boom, therefore even a 10% contraction would not be on the scale of what Britain experienced during its Great Depression. However, the argument could be made that having enjoyed a boom, Britain's subsequent bust will unwind much of the gains made during the past 10 years as the United States experienced during the 1930's. Therefore, this suggests economic contraction on a greater scale than that of the 1930's, especially if protectionism takes hold - which was the nail in Britain's economic coffin during the 1930's.
British GDP Has Already Collapsed by 30%
British GDP (AMBI) at the end of 2008 is estimated at £1.275 trillion, against £1.267 trillion at the end of 2007. However, sterling has collapsed against major global currencies by 30% or more, which translates into a real terms collapse in the country's GDP of 30%, i.e. 2007 GDP of $2.7 trillion has now fallen to $1.8 trillion - a collapse in GDP of over 30%. The Government, Bank of England and FSA are failing in their primary duty, which is to preserve the purchasing power of the currency.
The Labour government has destroyed the purchasing power of the British Pound by 30% so as to save 1% or 2% on the actual officially published GDP data during 2009. That's a price of 30% for a net benefit of at most 1.5%, which will still not prevent a deep recession from occurring. Quantitative Easing, which is madness personified, was for several months supported by the mainstream press. My November article, Bankrupt Britain Trending Towards Hyper-Inflation?, illustrated how it sacrifices long-term growth for possible short-term benefit
Therefore, whatever is the conclusion of this analysis in terms of sterling GDP contraction during 2009, what readers need to remember is that the real purchasing power of Britain's currency loss of 30% means that the country's GDP has already been sacrificed in lieu of hoodwinking the electorate into believing that things are not as bad as they actually are. Meanwhile, the price of currency devaluation is in much higher future inflation, which the government is hoping will not kick in until after the 2010 election.
British Pound Crash Failing to Boost Manufacturing
The Manufacturing sector was supposed to the save the UK economy from the economic bust in the light of sterling's 30% devaluation. However, given the collapse of global trade and demand, which has put paid to this false assumption (as I pointed out over 6 months ago), sterling's fall will not benefit Britain. This is because the manufacturing base of the country has shrunk to such a small sector of the economy that it cannot hope to offset the Financial sector's depression, which once contributed more than £40 billion in profits a year to Britain's bottom line. It is now consuming tax payers' funds to the tune of several hundreds of billions into an ever expanding black hole.
To make matters worse, the crash in the oil price has hit UK North Sea oil foreign exchange earnings and therefore contributes to sterling's downtrend with an exchange rate drop of 30%+ that offsets a large part of the benefits of the fall in crude oil prices. In fact we may reach a point in the near future of rising petrol prices despite continuously depressed crude oil prices, which the analysis of December 8th (Crude Oil Forecast 2009- Time to Buy?) concluded would remain depressed for the duration of economic contraction, i.e. probably for the whole of 2009.
Is U.K. Headed for an Even Worse Great Depression?
The purpose of this analysis is to map out the trend of the UK recession for 2009 and 2010 in terms of depth, the bottom and the potential recovery. The most recently released GDP data shows that the UK economy actually did fall off of the edge of a cliff during the fourth quarter of 2008 by contracting by a shocking 1.5% GDP. This compares against the government's recent forecast for 2% GDP contraction for the whole of 2009, which paints a picture of gross under estimation of the actual extent of economic contraction that is taking place at this time. Hence the adoption of the easy going terminology of "Quantative Easing" to hide the truth of money-printing on a scale that could bankrupt Britain. The evidence of this has been played out in the currency markets with sterling's fall to a 23 year low against the dollar, a fall of over 30% in barely 6 months.
The fourth quarter GDP crash of 1.5% is far higher than expected and explains why the government panicked, as evident by the deep interest rate cuts from 5% to 1% in just 4 months. The rate cuts are in addition to the £1 trillion banking sector bailout liabilities. The rate of contraction at 1.5% per quarter implies an annualised collapse in the UK economy of 6% which would amount to loss of national income of £72 billion, against which the government has so far committed £40 billion in the form of tax cuts, industry support and stimulus packages. However, the deviation from the trend of 2.5% growth per annum puts the gap at an additional £30 billion per annum.
The £1 trillion committed towards halting the banking sector's collapse on face value seems like a huge amount that should kick start lending, however this should be set against contraction of an estimated 30% of the UK credit market or £1.2 trillion. Distressed foreign banks pulled the plug on UK operations, on top of which we have had housing market deflation of £250 billion, and stock portfolios erasing a further £400 billion, which sets the £1 trillion of injections and liabilities against deflation of an estimated £1.85 trillion.
The recession looks set to run throughout 2009, with the consensus view that the recession will be the worst since the Great Depression of the 1930's during which time the UK economy contracted by 10%. The question now being raised is whether Britain is heading for its own Great Depression on a scale worse than that of the 1930's ?
Britain's Great Depression of the 1930's
Britain's GDP during the 1930's Great Depression fell by 10%, which on face value compares favourably against that of the United States that saw GDP contract by 30%. However, unlike the United States, Britain did NOT boom during the 1920's. On the contrary, the 1920's was a period of stagnation that started out with the Depression of 1918 to 1921 that saw GDP fall by 25%. Therefore, Britain's Great Depression in fact started in 1918 and did not end until 1937 and therefore lasted nearly 20 years. However in today's economy, Britain is coming off of a 10 year+ boom, therefore even a 10% contraction would not be on the scale of what Britain experienced during its Great Depression. However, the argument could be made that having enjoyed a boom, Britain's subsequent bust will unwind much of the gains made during the past 10 years as the United States experienced during the 1930's. Therefore, this suggests economic contraction on a greater scale than that of the 1930's, especially if protectionism takes hold - which was the nail in Britain's economic coffin during the 1930's.
British GDP Has Already Collapsed by 30%
British GDP (AMBI) at the end of 2008 is estimated at £1.275 trillion, against £1.267 trillion at the end of 2007. However, sterling has collapsed against major global currencies by 30% or more, which translates into a real terms collapse in the country's GDP of 30%, i.e. 2007 GDP of $2.7 trillion has now fallen to $1.8 trillion - a collapse in GDP of over 30%. The Government, Bank of England and FSA are failing in their primary duty, which is to preserve the purchasing power of the currency.
The Labour government has destroyed the purchasing power of the British Pound by 30% so as to save 1% or 2% on the actual officially published GDP data during 2009. That's a price of 30% for a net benefit of at most 1.5%, which will still not prevent a deep recession from occurring. Quantitative Easing, which is madness personified, was for several months supported by the mainstream press. My November article, Bankrupt Britain Trending Towards Hyper-Inflation?, illustrated how it sacrifices long-term growth for possible short-term benefit
Therefore, whatever is the conclusion of this analysis in terms of sterling GDP contraction during 2009, what readers need to remember is that the real purchasing power of Britain's currency loss of 30% means that the country's GDP has already been sacrificed in lieu of hoodwinking the electorate into believing that things are not as bad as they actually are. Meanwhile, the price of currency devaluation is in much higher future inflation, which the government is hoping will not kick in until after the 2010 election.
British Pound Crash Failing to Boost Manufacturing
The Manufacturing sector was supposed to the save the UK economy from the economic bust in the light of sterling's 30% devaluation. However, given the collapse of global trade and demand, which has put paid to this false assumption (as I pointed out over 6 months ago), sterling's fall will not benefit Britain. This is because the manufacturing base of the country has shrunk to such a small sector of the economy that it cannot hope to offset the Financial sector's depression, which once contributed more than £40 billion in profits a year to Britain's bottom line. It is now consuming tax payers' funds to the tune of several hundreds of billions into an ever expanding black hole.
To make matters worse, the crash in the oil price has hit UK North Sea oil foreign exchange earnings and therefore contributes to sterling's downtrend with an exchange rate drop of 30%+ that offsets a large part of the benefits of the fall in crude oil prices. In fact we may reach a point in the near future of rising petrol prices despite continuously depressed crude oil prices, which the analysis of December 8th (Crude Oil Forecast 2009- Time to Buy?) concluded would remain depressed for the duration of economic contraction, i.e. probably for the whole of 2009.
