FT.com
Dec 9, 2007
SourceAn economy based on ever increasing numbers of lawyers, bankers, accountants and journalists may sound like a horrible idea but it has worked well for Britain. Now, however, with the credit squeeze giving rise to fears of a global downturn led by the financial sector, it looks precarious. The very industries that have made the UK economy strong in the past few years - housing, finance and the public sector - also make it look vulnerable.
The first vulnerability is the one that gets the most publicity: housing. In a world full of house price inflation, Britain's boom has been extreme: an orgy of landlords, estate agents and desperate first-time buyers. A crash would cause pain for those who build houses, sell houses, and lend money against the security of houses. Tenants would profit from cheaper houses even as the owners of buy-to-let portfolios lose, but damage to the financial system would probably cause a hit to consumption.
A second vulnerability is the contribution of public spending to growth. A surge in government expenditure saved the British economy in 2001 when, by luck or by judgment, the start of Labour's spending boom offset a US recession. Now that boom is at an end. From next year the pace of public spending growth will slow and the government has little room to raise either taxes or its own borrowing. The economy will need a new source of growth in demand.
That makes the third vulnerability - the reliance of the economy on business services and finance for about 30 per cent of output - more disturbing. This sector is not just big. The health of its most productive part - the City of London - is intimately linked to the health of global financial markets, and like a star football player whose performance flatters the rest of the team, its growth rate flatters the UK average.
If there is a marked global downturn, led by falls in property and other asset markets, then the UK will suffer disproportionately. That may be true even if commodities and emerging markets are resilient.
The transition to an economy based on trade and services has been a boon for Britain. The country has gone from gloomy industrial decline to shiny, cappuccino bar modernism. But there is a cost. Tapping into the energies of globalisation has made the UK a geared bet on the strength of the world economy. For now that economy still looks robust, and a US recession as a result of the credit squeeze is still a possibility, not a probability. But times now get tough for the UK. Those who live by the global economy also die by it.