It looks like the downturn in the economy is now official – the BBC website have designed a logo for it. 

The questions on most people’s minds are: how long will it last? and, how bad will it get?

Many economists and analysts try to come up with an answer by looking at past recessions and looking for similarities to current circumstances.  However, there are so many variables involved in the economy that it is impossible to make predictions with any reasonable accuracy, indeed as the financial services disclaimer says – past results are not necessarily a guide to future performance. 

I prefer to ask the question – WHAT will drive Britain’s economic recovery? 

Will we let house prices spiral out of control again to help property investors, those inheriting / downsizing / stepping off the property ladder, and those who want to use their house as a piggy bank by constantly borrowing against it’s equity? 

Or will we lower interest rates and increase credit limits so that people can go out and splurge on imported goods that they can’t afford and don’t need, but will help keep retail and logistics workers in a job? 

Will we sell off some of Britain’s assets to help balance the books?  In the past couple of decades we’ve been having quite a fire sale – everything must go!  Utilities, Railways, Bus Companies, Airports, Corporations, Gold Reserves, Football Clubs, even the majority of sales of houses in London costing over £4 Million have been sold to overseas investors, whilst purchases of overseas assets by British firms have been notably thin on the ground.  Still, we could maybe pop the crown jewels on ebay, that would bring in a few quid to keep us going a bit longer :-/

Or we could just turn a blind eye whilst people in the city gamble recklessly with all our futures for their own short-term gain. 

Well, as far as I can see, that’s pretty much what underpinned the last “boom”. 

It’s unbelievable that Gordon is considering borrowing yet MORE money to finance tax cuts, in the hope that with this windfall we will all go out and spend, spend, spend to give a boost to the service sector. 

Borrowing is risky enough when you expect a windfall in the future.  e.g. taking out a student loan in the hope that you will be earning megabucks once you’ve got your degree. 

But Gordon’s idea seems to be pure panic and blind hope! 

The fundamental issue I see with the British economy is this:

If you manufacture cars, you can (in theory at least) ship them all over the world, earning overseas income to help pay for the goods that we as a nation import. 

But if you sell cars, you won’t find many people coming from overseas to purchase their new car here (even putting cost and steering wheel issues aside). 

So whilst the individual may not care whether they work on a production line or a car showroom just so long as they are getting paid, all selling cars does is move money around the country, with some syphoned off to pay for the imported car (or components if if was built here for the profit of an overseas firm). 

Of course some services can be exported, IT and Financial Services for example.  However, there was a big wave of offshore IT outsourcing about 5 years ago – all these programmers have 5 years of experience now, and are still only earning peanuts, so it’s practically impossible for high wage economies to compete.  And financial services, well I don’t think the rest of the world is too impressed with British and American financial conjuring tricks anymore (Ooh, arr, watch whilst before your very eyes I turn this sub-prime mortgage into pure gold!  That is, the gold watch I’m going to buy with the commission I make!)

In Britain, like many developed nations we’ve been moving wealth creating jobs offshore to countries where wages are low. 

The key problem is that the people who do the jobs, aren’t paid enough to purchase the goods they make.  Only the factory owners can afford them, and so they depend on developed nations to buy the goods (and services) they make. 

For example, according to a recent article on the BBC website, in January there were over 3,000 toy factories in China, by the end of August the global downturn meant that more than half of them had closed down. 

Henry Ford had his head screwed on.  He realised that by paying his workers more than the going rate, it would push up wages generally, and that was the only way people could afford to buy his luxury product. 

We seem to be in a situation now where we’ve taken a lot of the wealth creation out of developed nations, but instead of developing nations benefiting from this windfall of jobs and opportunities, we’ve no money to buy what they make! 

I’m sure things will pick up again – after all the media has a big part to play. 

When they reported, what felt like on a daily basis, record house price rises, people who weren’t in a hurry to buy their first home were panicked by the constant reminders that house prices were rising faster than they could possibly save, making them stretch themselves to the limit to get on the property ladder – making the situation even worse by increasing demand and therefore prices even further. 

Now that they report daily on doom and gloom of job cuts, firms failing, banks being bailed out, people who have no real reason to fear for their job security become cautious and stop spending, which makes the situation worse. 

But the media works in trends.  Once people get fed up of the current news trend, they try and find stories from the other perspective.  So when people get fed up of reading about doom and gloom and stop buying papers, they will start to find some good news stories, and things will start to move again. 

But unless the underlying issues are resolved in the World economy, and particularly the British economy (at least other countries in the EU for example still own their infrastructure and have firms to raise their economy when things ease) then sadly I think it could be a long time before genuine economic good times return.