So the UK is heading for recession. Why is this so bad?

Factual Questions
1

The headlines in the evening papers today were full of doom and gloom with the news that the economy in the quarter to September shrank by 0.5%, and looks certain to shrink in the next quarter as well, leading to an official recession.

My question is, why is this such a big deal? From the linked article,

So the economy has been growing for 16 years solidly. Why is one quarter, or even two or three or four of decline such a big deal? Surely it’s unrealistic to expect an economy to grow uninterrupted for ever? It’s down 0.5% this quarter, but that means it’s still a lot bigger than it was a year or two ago, and even if it shrinks for a full year, it’ll still be a lot bigger than it was in 1992. And I don’t recall us all having terrible quality of life in 1992.

So can somebody explain in simple terms why a shrinking economy is such a terrible thing? And, for that matter, exactly what a “shrinking economy” means - is it in terms of GDP, or something else?

2

It’s not a big deal as long as you don’t lose your job and any prospects of finding a new one. Since many people live on credit, or at least have a mortgage, the prospect of being out of work for some number of months is problematic. For some being out of work is not a huge deal since they have other means of support. If 10% of the workforce was out of work think of how that would impact all of the services that rely on people getting paid regularly. It’s not the end of the world, but I wouldn’t want to lose my job and have to live off of my savings for a while…

3

Recession s a bad thing. It is, however, inevitable, and I have limited sympathy for the many who make no preparations.

4

I just accidentally a recession. Is this bad?

5

It is the way you put it. :slight_smile:

As for the OP, a recession is more than an occasional bad quarter. In the U.S., the normal definition is two straight quarters or half a full year of downturn. It’s a serious reverse. People will lose jobs, companies will go out of business, growth will slow or stop. It doesn’t matter that it was larger in the past. That doesn’t help anybody today. The country is also more populous than it was then as well.

Countries have actually become pretty good at managing economies so that down trends are normally limited to individual months rather than half years or longer. When that happens it’s huge news.

Boom and bust cycles were once thought to be ineradicable parts of capitalism. I don’t think many economists think this is true anymore. It’s true that a bust is not necessarily the same thing as a recession and the recessions since WWII are nowhere near as serious as the “Panics” in the 19th century in the U.S. (I can’t speak to the UK.) I don’t know if recessions are “inevitable”. They might be, but the current one certainly wasn’t.

6

But why? 0.5% is not really very much. Is capitalism so predicated on continuous growth that even the slightest blip is really bad news? If so it seems pretty unsustainable, as it’s clear that the economy can’t keep getting bigger for ever - after all, we live on a finite planet.

If the GDP was X billion pounds in 1998 and we did just fine, and it has been growing continuously for 10 years since then, then why on earth should it matter if it dips a tiny bit now? It means that 6 months ago the economy was bigger than it has ever been in history, and now it is still within 0.5% of the biggest it has ever been in history. It’s surely no different from where we’d be if the economy had stayed the same size for the past year or so (not knowing the exact figures).

7

Which in fact is why some people bitterly criticize our economic system, particularly those who blame our current system for ecological devestation.

The fact is that on the whole, ignoring regional imbalances and temporary setbacks, the whole economic, political and cultural system that might be broadly labled “western civilization” has been growing more or less since the Renaissance and definitely since overseas trade began in earnest in the sixteenth century. Growth has been the norm for nearly 500 years now, with scientific advances bringing new technologies that drive new development.

Consider the whole concept of “investment”. Roughly speaking, that means giving your money to people who promise to pay you back with interest. Over the last five centuries, this has variously meant funding expeditions to the Indies, covering the cost of developing new inventions, building infrastructure like railroads and factories and of course loaning governments the funds to fight wars. We’ve come to regard it as normal that a person can pay out money now with the confident expectation that they will get their money back and then some years later, such as when they retire.

Yet for millennia no such thing was possible. Investment as we now think of it was impossible in what were basically steady-state economies. The only people who could confidently expect not to have to work until they dropped were the landed: people who owned land that others worked and payed out rent and taxes to the owners. Which is why warfare was virtually the only way anyone with ambition could get ahead- kill some people and take their land.

As someone once remarked, “What would happen to capitalism if there were nothing new left to invest in?” For good or for ill, our whole system is geared towards funding expansion. No one knows how you could even have a modern economy without it.

8

It would basically be the end of civilization as anything except the management of decline. That is, your children would and could never do any better, without growth. No one and nothing could ever improve anything.

It is, in fact, a horribly depressing vision of the world, and one not embraced or accepted even in the supposed eras of non-growth.

9

One thing a lot of people don’t get, is that you can have economic growth and improvements in life, without increasing the amount of raw materials used. My current computer uses less raw materials than the one I had 10 years ago, but is better in every way. Or look at how much better cars are today, compared to ones a few decades ago, even though they use about the same amount of steel and other materials. And more automated production of food & manufactured goods frees up labor to do various services, that don’t actually use all the much natural resources, like doctors or the entertainment business.

10

If you get a cold, its not usually a cuase for concern, hell not usually even a reason to miss work. If you get a cold after major surgery, its a complication which is bad, not fatal, but bad. Its the timing of the recssion, reather than its fact which makes ot so bad.

11

You need growth to offset inflation. If you have an economic contraction plus inflation, things are getting worse, not remaining static- and you will almost always have inflation in a market economy. If you have zero growth and a static population size and no inflation, then you’re doing alright - but you won’t.

12

This present crunch was caused by, IMO, gambling,at least in the U.K. anyway.

House/flat etc.prices rose at an incredible rate many times over and above inflation for any other goods or services.

The valuations were based not on what the properties were actually worth but on what potential buyers would be prepared to pay before they in turn sold them on for their own profit.

Much has been made of irresponsible lending by banks to private individuals(and of course construction companies)based not on their ability to pay back their loans but on the liklihood of their being able to quickly sell their properties at a profit.

But the guilt is not theirs alone because the people who took out the mortgages themselves were doing so on exactly the same premis.
Many of them knew that they didn’t have a hope in hell of paying back their loans for even a short period let alone over the full term.

We had a plethora of media stories about people who had lost their homes and I think that we were supposed to feel sorry for them.

Except that they weren’t buying to provide themselves with a home but were trying to make themselves some easy money.

We also had sob stories about how "First time buyers"couldn’t get a foot on the ladder because prices were too high.
What they meant was that others trying to make money had got there before them so that they needed more money themselves or bigger mortgages before they themselves could cash in on the property market.

Then of course when house prices DO drop we get all the complaints about negative equity.
I’m pretty heartless on that one aswell.
If you bought the house as a home it doesn’t matter that in value its worth less then what you paid for it.
Its still the home you thought was worth the price when you bought it.

If you wanted to make some money but failed in your objective then you’re in exactly the same position as a casino/racetrack gambler whos gambled and lost,except that they have nothing to show for their failed bet but you at least have a roof over your head.

I may be wrong on this so anyone feel free to correct me but in France for example buying a residential property is a much more laborius and drawn out process that discourages people from buying and selling properties to make a quick buck and as such keeps property valuations at a stable and more realistic level.

If this is indeed the case I think that theres a good case for adopting similar legislation in Britain.
Do away with all of the amateur real estate speculators and it can only be a good thing for the average person in the street.

Now that this has brought the banks down it means that loans or credit for legitimate purposes, as in helping companies expand and modernise are now thin on the ground if even available, and a lot more modest in size.

This can mean businesses downsizing,limiting new ventures or even going bust.

This results in job losses,reduced tax income for governments and increased welfare payments for the newly unemployed.

The sad thing is that those who weren’t industriously trying to get their snouts in the trough when certain parts of the economy was operating at superheated level are suffering as much as the perpetrators.

Dont get me wrong I’m all for capitalism and making yourself some money but I am totally against greed motivated stupidity.

13

A much easier way to accomplish this goal is simply to tax second homes really, really heavily. You see that to some degree in the US - most states have “homestead exemptions”, which basically offer a big tax break on a primary residence, and which don’t apply to second homes or rental properties.

14

I don’t know about the UK, but in the US over the past 20 years housing prices have been rising pretty steadily. The East and West Coast seemed to rise a lot faster than the upper Midwest or South, for example, but overall everyone who owned a house was making money while they slept. Not only that, but the US goverment rewarded home owners by giving them tax breaks that renters simply don’t get. And since the American Dream is to own your own home millions of people stretched to get into their first house. When I bought my first house in 1980 it was certainly a stretch for me… but 4 houses later it was certainly worth it when I moved up into the best neighborhood I could find in 2005.

I don’t think it’s fair to call all of us greedy for wanting to buy a home. For the past two decades it seemed like a safe place to put your money. Your house appreciated 5% a year or more, you got a good tax write off, and you weren’t at the mercy of a landlord who could raise your rent once your lease expired. The stock market went up and down, the price of gold went up and down, but your house continued to appreciate year to year. Where I live demand overshadowed supply and certain houses in the best neighborhoods commanded multiple offers with the successful buyer paying $75,000 over asking price and being happy about it. I know it sounds strange, but we all knew it was a bubble and we all knew it wouldn’t last forever. So did evil mortgage brokers force us to buy houses we could barely afford? No. Were all buyers greedy and just interested in making a profit? No. There were good reasons to buy a house and I think most people stretched themselves past what someone might think was prudent, thinking that as their house continued to appreciate they could continue to pull money out of it and finance their lifestyle. So when housing prices started to fall, which we all knew would eventually happen, people paniced and tried to sell their houses before the value dropped too much. Many people did sell their houses… others couldn’t make their payments and ended up walking away, and there was more and more inventory of unsold houses that drove down prices even further. Buyers sat on the sidelines and waited for the bottom. Many are still waiting.

So a recession is dangerous because as more people lose their jobs and more companies go under more houses end up unsold on the market. At some point things will get better and jobs will be created and people will start buying houses again. Once the excess inventory is gone then prices will slowly start to rise… at least in the better neighborhoods. When will that happen? Nobody knows for sure, but experts are saying that housing should start to return to normal in the US in 2010. Can you hold out that long even if you lose your job? If you can then you can weather even a deep recession. If you can’t, then your house may go into foreclosure and that will ultimately delay the housing recovery. Let’s hope we finally bottom out next year and that things start to pick up again in 2010.

I don’t think you should feel sorry for the speculators who only bought houses to turn a quick profit, but there are honest hard working people who stretched themselves to get into the best home they could almost afford and now are being sqeezed by dropping house prices. Many of those people took what they thought was a reasonable risk when housing prices were going up every year. All they have to do now it hold on until the market recovers sometime in the future. Easier said than done.

15

Isn’t the latter the definition of the former?

16

Its an artificial value very similar to the value of a share in a Pyramid scheme,it makes money as long as there is a potential supply of new buyers/investors to make money out of and who themselves know that the intrinsic value of their share is, in the pyramid scheme worthless,in the housing market a hell of a lot less then the advertised value.
But that they too are looking to a continuing supply of newbies who have the same expectations.

As long as there is general confidence in the supply of new investors then profits will continue to rise but inevitably the whole edefice will come crashing down.

Inevitably?
Yes, eventually one of two things will happen, either present or potential investors will lose confidence in selling a ridiculously overpriced item,once the jitters set in thats the end of the boom, OR

The cost of investing in the product becomes so hideously expensive that loans or not the price is put beyond the reach of the mass investing market.
Its always a case of not if but when the balloon bursts.
For the gamblers involved its a fine balance of how long they can keep their nerve and continue making money without getting burnt by hanging on just that little bit too long.