CITY FOCUS: 2008, a turning point in history

By SAM FLEMING FOR MAILONLINE
Updated:

Back in 2003, Mervyn King came up with an acronym to describe Britain's benign economic backdrop. Stable to the point of being boring, the economy had become 'nice' - Non-Inflationary and Consistently Expansionary - the Bank of England governor declared.

We hadn't experienced a quarter of falling output since 1992, and inflation had stuck resolutely within the Bank's target range. With employment heading towards record levels, the UK was in the unaccustomed position of being the economic envy of Europe.

Swollen with pride, then chancellor Gordon Brown repeatedly pointed to this record when lecturing fellow finance ministers on how to run their countries.

Timescale: Gordon Brown, right, and Mervyn King, inset, were at the forefront of a momentous year

Timescale: Gordon Brown, right, and Mervyn King, inset, were at the forefront of a momentous year

. King himself boasted about Britain's 'sound and proven' policy framework, claiming it would help us weather any economic squalls.

Well, things aren't looking quite so nice now.

In 2008 Britain has gone from a record-breaking spell of uninterrupted growth to its
steepest slump for decades.

We are expected to suffer the deepest recession of any G7 nation next year, forcing the government to run up blockbuster deficits as it props up the economy.

Unemployment will head steadily toward 3m, sending repossessions back to levels last seen in the early 1990s. Bankruptcies, already touching record levels, will blast through the roof.

To be fair, no credible observers ever claimed we could enjoy perpetual growth. King, for one, warned that pleasant conditions could not last forever.

'We must hope that Lady Luck will continue to smile upon us,' he said in his 2003 Leicester speech. But he added: 'Will the next ten years be as nice? That is unlikely.'

Yet the very notion that Britain's economy experienced a 'nice decade' in the first place must now be open to question. It is now clear that our ostensibly robust economy was dangerously unstable.

It is true that traditional goods price inflation was consistently low until this year. But the same could hardly be said about property values - which tripled between 1997 and their August 2007 peak.

And during those years when 'Lady Luck' was smiling on us, Britain's households were busily racking up the biggest personal debt burden of any leading nation.

Our personal liabilities now stand at more than 180 per cent of disposable income,
compared with less than 100 per cent in France or 141 per cent in the US.

In retrospect, it is odd that so few policymakers were perturbed about this. For years King said our heavy debts were a 'social' issue for some over-stretched households
rather than a problem for the overall economy.

In the light of the events of the past 12 months, this looks like a spectacular misjudgment.

And while Brown was claiming to have single-handedly ended 'boom and bust', the seeds of an almighty crash were being laid in the speculative world of City finance.

Bank deputy governor Sir John Gieve, for one, has acknowledged the Bank of England got things wrong. He admitted on December 22 that the Bank did not expect the fallout to be 'anything like as serious as it has turned out to be,' while describing Britain's debt culture as 'crazy.'

We still await mea culpas  from King and Brown - the men best placed to cool our asset boom.

King's defenders will claim he did not have the tools to prevent Britain's disastrous bubble. As Gieve pointed out, interest rates alone are a 'blunt instrument' ill suited for taming credit booms.

But there is no evidence that the Bank was seeking additional powers to calm the housing market or restrain bank lending - or even that it considered these phenomena a major concern.

Far from urging caution on the City, Brown and his sidekick Ed Balls became its biggest cheerleaders, praising the 'innovative' products being dreamt up by over-fed bankers.

It amounted to the sort of myopic dash for growth that Brown and his acolytes repeatedly disparaged.

Bank of America economist Matthew Sharratt said Britain is experiencing a 'return to boom and bust.' UK policymakers have made things worse by reacting slowly to the credit crunch, he argued.

'In hindsight, macro-economic policy was not sufficiently supportive during the first half of 2008,' he said.

As a result, the Bank of England may lower its key rate to as little as zero in the first quarter of 2009.

The backdrop could be the steepest annual drop in economic output since the 1940s.

Our days of relentless growth and low inflation now feel a world away. But as King might say, it was nice while it lasted.

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