Is the economy really that bad and if so, what should we all do?

Arguably we have been in an on-going recession (or stagnation at best) for the past four years. Most people’s living standards are being gradually eroded by static incomes, plus some nasty, corrosive inflation. For nearly all of us these recessionary days are difficult, but are especially perplexing to those under the age of 40 who have probably never experienced a full-blown ‘down-turn’. Consumerist lifestyles are under pressure as families struggle to provide the basics.

So what makes this recession different from previous ones?

On one hand, it is a worldwide slowdown, but it is also a combination of other powerful factors.

Western governments and consumers have piled on debts for more than 60 years and ‘the markets’ have said that ‘enough is enough’- sort your finances out! The credit and property booms in the USA, peripheral Europe and of course here, have caused the biggest banking bust in history.

The primary weapon used to fight this crisis – lowering interest rates – has now run its course as you can’t get much lower than 0.5%! The other weapon is electronic ‘Money Printing’, technically known as ‘quantitative easing’ (QE), probably to confuse ordinary folk, and when this doesn’t work then it’s even more money printing - hence another £75 billion announced by the Bank of England last week. If we then add this to the original and massive £200 billion this then equals approximately 18% of our economic output (GDP). Considered monetary stimulus – and this may not be the last – is probably a better course of action than inertia, but generations to come may not thank us!

The saddest part of the current downturn has been an astonishing lack of political leadership across the western world. Earlier this year politicians in the USA ‘went to the wire’ before agreeing a budget. In the ‘Eurozone’, 17 countries cannot agree on how to deal with Greek, Spanish, Italian and other debt piles. More fundamentally, can different sized economies have the same ‘euro’ currency - without either political integration or permanent transfers of money from rich Germany to ‘Club-Med’ nations on the edge of Europe? So, the perceived villains of the peace (free markets, ratings agencies, hedge funds etc), punish us all until these problems are resolved. A ‘lost decade’ in investment markets, and perhaps your savings, is a symptom of a wider political malaise.

Is this worse than other recessions? We can apply a human way of measuring this, by using ‘The Misery Index’. This is the Inflation Rate (RPI 5.2%) plus the Unemployment Rate (7.9%). By this method we have a current rate of 13.1, very high by the standards of this century. We would have to go back to early 1994 for higher levels of ‘misery’. This is despite the Welfare State providing a far better safety net than in, say, the 1930s.

There are always losers in recessions, and currently the biggest losers are the young/inexperienced/unskilled/unemployed, those pensioners on fixed incomes, prudent savers with miserable rates of interest and those who are being ‘shown the door’.

Currently, the economy is being rebalanced away from a ‘too expensive for these troubled times’ public sector, but as yet the private sector is not taking up the surplus. The few winners are borrowers with large mortgages on low interest rates, the highly-paid in secure jobs or those blessed with large indexed-linked pensions.

My concern is that this is a very painful restructuring of our economy which may take years to sort itself out.

The debate is really between two camps: ‘debt reducers’ and the ‘borrow-yet-more-to-invest-our-way-out’ group.

All of us would like higher capital expenditure and investment in improving training and skills, but who pays? The medicine is causing all sorts of unintended consequences –examples are that banks are re-capitalising themselves rather than lending, pension deficits are rising, individuals are in a quandary about miserable annuity rates and are pushed by low interest rates to take more risk with their savings.

Then the outcomes of ‘QE’ are unpredictable; these range from concerns about rampant inflation to ‘Japanese style’ deflation, currency wars, further banking rescues and general instability which tends to reduce trade and long term investment. Please do not expect emerging China to ride to the rescue as they have their own problems. The world’s confidence in the financial system is easy to track - just follow the price of gold!

As Christians, our response should be to maintain our eternal confidence in God to provide for our needs even in troubled times.

Then there a lot of practical steps; for example, if we are blessed with ‘provision’, consider releasing some of those resources? Your investment in people, a charity and particularly a capital item (eg. a longed-for conservatory!) at a fair price can have an important ‘multiplier’ effect by helping those in the supply chain.

Longer term saving helps the economy too. We need to encourage the government to spend their money wisely and make the long-term investment decisions for the good of all. There needs to be a shift towards being more community-minded, helping in a practical way in your locality, as well as waiting for the ‘big picture’ to sort itself out.

The economic jury is out – and may be out for a long time to come! It looks like a bumpy ride for the next two, maybe even three years.


Aidan Vaughan is Chairman of the Association of Christian Financial Advisers and joint Managing Director of MPL Wealth Management in London