Over the past year the world has watched in awe as the United States, the self-declared greatest country on earth, was brought to its knees by the recession. But few have noticed the whimpering in the corner. That would be Britain, and by many measures, it’s suffering much, much worse. It’s a sad conclusion to Cool Britannia’s experiment in American-style capitalism.
The carnage is everywhere. In the second quarter the U.K. economy shrank by 5.5 per cent. With unemployment soaring, the opposition Tories claim five million Britons haven’t held a job since the Labour government came to power in 1997. Everyone, it seems, has been hit. Duchy Originals, an organic food company launched by Prince Charles two decades ago, is reportedly teetering on the brink and is in talks to be gobbled up by a grocery chain. As the prince himself might say, “We are not immune.”
It’s a stunning reversal from just a few years ago. Riding the crest of soaring house prices and low unemployment, it was a time of untrammelled prosperity and creativity for Britain. Then-chancellor of the exchequer Gordon Brown was fond of boasting the nation was enjoying the longest period of economic growth in over 200 years. Britain was so successful, America was starting to feel nervous. In early 2007, billionaire New York City Mayor Michael Bloomberg, along with other senior officials, agonized over a report from McKinsey & Company that warned London was usurping his city as the financial capital of the world. “New York has become less attractive relative to London over the last three years,” the report stated flatly.
As we know now, the U.K. was chasing the same disastrous strategies that put the U.S. economy on such shaky ground—at times, to an even more extreme degree. Consumers were charging up their lavish lifestyles on credit cards at a feverish pace. By 2007 British households were the most indebted in the G7 group of developed countries, with a debt load totalling 185 per cent of disposable income. (The U.S. peaked out at a mere 142 per cent.) The housing market was also heavily reliant on subprime mortgages to prop it up. By some estimates, in 2007 the average house in Britain cost seven times what first-time buyers earned in a year, making British homes even more expensive than U.S. homes according to that measure. The country’s largest financial institutions were all too eager to play along, so long as it meant fat bonuses for bankers and hedge fund managers. Now many of those globe-conquering institutions, such as the Bank of Scotland, are owned by taxpayers.
The recession has touched off a year of indignation and ridicule for the country. Earlier this year the U.K. economy was overtaken by France in size. Just as cringeworthy for Brits, France and Germany are now expected to return to growth well before the U.K. does. Meanwhile, the financial crisis has helped to expose a massive government expense scandal, in which politicians from all three parties were caught foisting bills for everything from pornography to moats for their country estates on taxpayers. The orgy of excess came to symbolize a nation out of control.
A group of accountants recently declared that Britain’s recession is “at an end,” but before it can hope to get itself back on track, the country will have to deal with a staggering debt load. Last month Britain’s debt passed the $1.4-trillion mark. Every month the country must borrow nearly $18 billion just to keep government services running. The U.S. is faced with its own crushing debt load, of course. But the International Monetary Fund predicts Britain’s debt will swell to 100 per cent of GDP within five years, twice as fast as in the U.S. In May, Standard & Poors, the credit rating agency, lowered the outlook for Britain’s debt from “stable” to “negative,” raising the spectre of an outright downgrade of its sterling AAA rating. It would be a frightening move that would drive up borrowing costs and further hamper a comeback.
Howard Wheeldon, a senior strategist at BGC Partners in London, now believes that Britain’s recovery is more at risk than America’s. “The U.S. has a much greater freedom to operate than a small island country which badly let itself down,” he says. Wheeldon predicts it will take more than a decade to bring Britain’s public finances under control. Making matters worse, Vicky Redwood, an economist at Capital Economics in London, predicts the U.K. will have to cut spending by two to three per cent a year, and impose tax increases of at least $36 billion a year to right its finances. “We’ve obviously passed the worst and some sort of recovery is underway,” she says. “But there’s still the prospect of a severe fiscal consolidation.”
Last fall, in the darkest days of the crisis, Queen Elizabeth met with economists from the London School of Economics and asked a simple question: “How come nobody could foresee it?” It’s a question the island nation will be asking itself for years to come.