How bad will this depression be?

16 February 2009

It's remarkable to look back to the days, not so long ago, when German politicians were commenting on the UK's credit crunch problems, now that Germany's own economy has entered a sharp slowdown. The news that its economy contracted at an annual rate of 8.4% in the fourth quarter is way beyond the falls in the UK so far. If Deutsche Bank is to be believed, the economy will have shrunk by nearly 9% before the end of 2009!

Japan is worse, its fourth quarter GDP numbers fell 3.3%, this is the sharpest economic decline since 1974 when oil prices quadrupled for a non-oil producing country. Forecasters expect Japan's economy to shrink by 12.7% this year. These are startling numbers.

Two of the world's largest 3 economies shrinking at or around 10% per year? With a global economy its impossible for this contagion not to hit most other countries.

I now expect the UK economy to decline more than 5% this year and this will seem relatively benign compared to Japan, Germany, Spain, France, Ireland and probably the rest of Europe.

Having just got used to the "recession" word are we soon to use the word "depression" ?

Why has all this come about? Bankers taking bonuses? Not in my view.

Having talked to and met over 750 businesses in the last 6 months we can say that the fall in sales experienced by most, was so savage and so sudden in Q4 last year, that they were stunned.

There can be only one explanation for a sharp slump in sales across a myriad of business types - FEAR.

Are we all worried that the powers that be seem to have no "power" to deal with this slump? Perhaps this is why business people stop placing orders for new equipment, cars, trucks, vans, printing presses, servers, PC's, buildings, marketing and advertising spend and on it goes. A wait and see approach to business decision making in effect mirrors dilly-dallying of governments on the other route cause - most of the banking sector is INSOLVENT.

Until we address this and deal with the necessary restructure of the banks, we will not see fear replaced by optimism.