THE ECONOMY: HOW BAD WILL IT GET A SPECIAL REPORT BY WESTMINSTER

0 Comments | Sunday Herald, The, Jun 8, 2008 | by JAMES CUSICK

NOTHING travels faster than bad news. Last week a report from the international Organisation for Economic Cooperation and Development (OECD) ripped into the British economy, branding it the equivalent of a basket case. It criticised the way the UK has been run for the past decade, saying the options left to the government were limited. It slashed growth forecasts for this year and the next, and must have left economists in the Treasury and the Bank of England sprinting for their calculators.

The OECD's conclusion was that Britain is heading for a worse slowdown than anyone has previously predicted, accelerating fears that the UK economy and recession are shortly to become familiar neighbours.

In the upbeat forecasts from the Treasury over the past year, both Alistair Darling and Gordon Brown have serially reinforced their idea that the UK is well placed to withstand the shock waves that will inevitably follow from a global downturn. The OECD forecast, which Whitehall in recent years has traditionally dismissed as being anti-Labour, slashes UK growth to 1.8per cent this year and 1.4per cent for 2009. The Treasury's 2.5per cent growth forecast now looks like what one City analyst called "AIW - Alistair In Wonderland".

Steady employment levels have also been questioned by the OECD, with the Parisbased institution saying UK unemployment will rise by more then 200,000 over the next 18 months, taking the total to 1.81 million, maybe too psychologically close for political comfort to the two million mark.

The way out? The OECD say there now isn't one, blaming the UK's "excessively loose fiscal policy", which is a coded way of pointing the finger at Gordon Brown and his policy of borrowing heavily and spending too much over the recent boom years.

Figures from the Chartered Institute of Purchasing and Supply, which don't routinely receive much media attention, show the performance of the UK's service sector, which makes up three- quarters of the value of UK Plc, in retreat. Output here is down for the first time in five years. Consumer confidence is estimated to be at its lowest level since 2004; input costs are rising and will get higher still, with oil prices forecast to jump well past last week's record level of dollars139 a barrel.

In the first three months of this year - before the full recessionary pressure from falling house prices, the tightening credit crunch and the super-spike in oil prices kicked in - unemployment was up 14,000 to 1.61 million. And worse will follow.

Within the next month or so, the governor of the Bank of England, Mervyn King, will indulge in what outsiders will see as a quaint British exercise. When he should be pressing every alarm bell in Threadneedle Street, he will instead "write" to Darling and explain that the government's infl ation target of 3per cent can longer be achieved. "Sorry, Chancellor, " King could write, "infl ation is on its way back."

For those looking for a silver lining in the gathering storm, there is not much to find.

Alan Greenspan, the former head of the US Federal Reserve central bank, believes that, far from being well placed to survive, Britain's economy is even more exposed to financial turmoil than that of the US.

THE CITY

IN the financial tsunami that has swept across institutions in the US, Europe and Britain, involving a global write-down totalling dollars340 billion over the past 12 months, a reduction in employees and cost-cutting is inevitable. For London and the City, that will mean a loss of 40,000 jobs, according to analysts at JPMorgan Chase.

That's bad news for the Treasury, which has relied on a booming City to boost the tax revenues that come with bumper bonuses and lavish "trader" spending. The cut-backs mean more people looking for jobs in the City in the past month than at any other time in the past four years.

Worse is to come. Bear Stearns and Citibank announced global job cuts of 65,000 over the past year. RBS says it will cut 7000 jobs. Salaries are down, bonus payments are predicted to be slashed to their lowest for five years and there are fears that the onceimpregnable momentum that built London into the world's major financial capital is ebbing away.

What happens in the City is felt elsewhere.

With Britain's manufacturing sector barely growing at all, banking and financial services have been the foundation of New Labour's decade of success. Take away the power of the "square mile" and Britain is back to square one.

BANKS

THE collapse of Northern Rock last year was the first public sign that Gordon Brown's serial claim of ending the days of boom-and- bust economics in the UK was a Treasury fantasy.

Nationalised by the government in February and backed by a GBP20 billion loan from the exchequer, home repossessions at Northern Rock are currently running at twice the pre-nationalisation rate.

Northern Rock was a high-profile casualty, but many of the UK's biggest banks have, and will, require, intensive care. Bradford and Bingley was exposed in the lucrative buyto-let market; shares in HBOS fell 18per cent in a week following the announcement of trouble at B&B.