What’s The Truth About Our Economic Prospects?

Ed Bowsher at Lovemoney.com has recorded a video featuring the opinions of financial commentators Justin Urquart Stewart from Seven Investment Management, mortgage expert, Ray Boulger from Charcol and editor of MoneyWeek, John Stepek to try to get to the bottom of whether we’re truly starting to come out of the recession, or whether we’re destined to suffer from it for some time to come. The conclusions they come to make for some sobering viewing, and suggest that the effects of this recession could be felt for several years.

We’re seeing conflicting news on a daily basis – on one day we’ll see figures suggesting that house prices have stabilised or are even increasing, the next we’ll see that more and more jobs are being lost. So it’s difficult for us to know what to believe, and of course what it all means for us.

Much has been made of the comparison with the depression in the 1930s (which in a lot of respects is very wide of the mark), but the video suggests that a better comparison is that of the recession in Japan, which lasted from around 1990 until just a couple of years ago (the “lost decade”, although it lasted for 16 years).

In the case of the Japanese recession, credit was easy to come by and the resulting house price bubble should have been a good indicator that things were going to come crashing down at some point (of course, it’s easy to say that in hindsight, in the same way that it’s easy now to see that house prices here couldn’t continue rising as they were, although some people liked to believe, or liked to promise, that they would).

The reason Japan’s recession lasted for so long was because they had a lack of lending from banks, and also because they had a period of deflation – prices were falling, so there was a reluctance to spend. Does any of this sound familiar?

Another factor to take into account is consumer confidence – which is largely fuelled and driven by the media.

We’re bombarded with both good and bad economic news, especially during this downturn. Let’s not just point the finger at newspapers here – TV and more recently the internet has meant that economic news and views, whether correct or not (and often, it doesn’t matter either way, just a story itself can cause problems, as in the case of Northern Rock, where bad news about the society caused panic amongst its savers), can be spread far quicker than they were in previous downturns, which can have both a positive and negative effect.

I’d like to think that, on balance, the internet has helped us through this recession more than it has hindered us, as it has allowed us access to far more information about the economy than we ever had before, and it’s far harder for bad news to be hidden these days. (It has also allowed us to tighten our belts more efficiently than we ever could have, finding the cheapest prices for insurance, shopping etc.)

But as negative stories tend to get more paper sales and page views, these may have had a greater impact than ever before. A favourite topic for the media is of course house prices – which have seen weekly scrutiny thanks to the various house price indexes that are published. As we mentioned above, there have been some suggestions that prices may have stabilised – but the video suggests this could be more to do with a lack of supply rather than an increase in stability in the economy or confidence amongst buyers. We’ve known for a few years that the supply of houses wasn’t enough to satsify our demand, and that doesn’t appear to have changed.

The video concludes with the sobering news that we’re likely to see several years of very slow growth – possibly 1% – 2%. Given the comparison with the Japanese recession, could it be a decade or more before we see more impressive growth figures?

In some ways, I’m not sure this would be such a bad thing.

Granted, it will probably mean more people losing their jobs, which I wouldn’t wish on anyone. But there have been some signs that we’re already beginning to forget about the difficulties we’ve been through – we may soon be officially out of recession, even if these technical definitions of economic stages  do not actually make much difference to the average man on the street – and if something positive is to come out this recession, it would be good if it was less reliance on credit and there was a change to the “buy now, pay later” culture we seem to have got ourselves in, along with greater controls on the banking industry to ensure that we don’t get ourselves into the same mess again.

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