Five reasons to fear the future

If you think that Britain is back on its feet... think again.

Although I'm very much the optimist in everyday life, I'm something of a pessimist when it comes to the short-term future for the UK economy. To me, the glass isn't half-full or half empty. Indeed, it looks almost completely empty, bar about an inch of lukewarm cooking lager!

Here are five reasons why I believe that we should be prepared for some tough times to come -- regardless of which party wins the General Election next year (by 3 June 2010):

1. Our economy is fragile

Other major nations have bounced back much quicker than the UK, which has been slow to emerge from recession. Already, the UK economy shrunk for six quarters in a row, which is the longest downturn since quarterly records began 54 years ago.

France and Germany started growing again in the second quarter of this year. The US, Japan and Canada emerged from recession in the third quarter. Alas, the UK economy recorded a 0.4% decline in the third quarter of this year. Spain -- another country which experienced a huge credit and house-price boom -- is still shaky.

Thus, Britain's recovery is six months behind the big Continental countries. Then again, modest growth is expected in the final three months of 2009, which will be a welcome relief for British businesses and consumers. Nevertheless, it will probably be 2011 or 2012 before the UK economy gets back to the peak it hit in 2007, before the credit crunch, banking collapse and economic downturn laid us low.

2. Our national debt is colossal

In the 2009/10 financial year, HM Treasury is expected to spend £175 billion more than it collects.

That's a massive figure, so let me put it into context: our national debt is rising by £1 billion every two days. In other words, as each week goes by, the government spends over £55 more than it earns for every one of the UK's 61 million residents. This year alone, your personal share of the national debt will increase by roughly £2,870!

In order to shrink this black hole at the heart of our nation's finances, the government must cut public spending and raise taxes. Of course, this will curb consumer spending, slowing down the economic recovery. Alas, with the national debt standing at over £850 billion (nearing £14,000 a head), HM Treasury has no choice but to cut back, as the UK cannot keep over-spending forever.

3. Personal debt is too high

While our government is digging the country deeper and deeper into debt, consumer appetite for credit has cooled this year.

During the twin booms in credit and house prices, the biggest leap in personal debt (including mortgages) took place in the year to July 2004, when it increased by over £125 billion. In the year to September 2009, personal debt grew by a tiny sum: just £1.2 billion. This is the lowest yearly increase in debt since at least April 1993 (and probably a lot earlier, as my data from the Bank of England go back only to this date).

So, the banks have turned off the credit taps, plus 'creditmania' is no longer so attractive to consumers. Nevertheless, our personal debt now stands at £1,459 billion, which is more than three times what it was in September 1996. Indeed, our personal debt tripled in the 12 years between 1996 and 2008, rising at an average of 9.6% a year. Frankly, this burden is too great and we must work at bringing it down to a sensible level.

4. Mortgage lending is pathetic

Mortgage lenders have made a big deal about the recovery in mortgage lending during 2009. However, having crunched the numbers, I'm not about to dance to their happy little songs!

The harsh reality is that mortgage lending is in a terrible state, as the following data proves:

Gross mortgage lending by year

Source: Council of Mortgage Lenders

As you can see, gross lending (which includes home loans, remortgages, etc.) peaked in 2007 at over £360bn, or £30bn a month. This year, it's been running at around £8.7 billion a month. That's a fall of more than seven-tenths (71%) on the 2007 peak. At this rate, mortgage lending in 2009 will be at its lowest level since 2001. So much for the post-crash bounce-back!

Instead of analysing all mortgage lending, let's now look at lending solely for purchases:

Loans for house purchase

Source: Council of Mortgage Lenders

The £39.7bn lent to homebuyers in the first eight months of 2009 is down 30% on the same period of 2008 and down a whopping 63% on 2007. In fact, it's probably the smallest sum lent to borrowers since the mid-Nineties, before the housing boom took off.

To me, these figures scream that there will be no return to steadily rising house prices for a long time to come...

5. Money's too loose to mention

Finally, the Bank of England is doing its bit for Britain by creating 'electronic money' in a process known as quantitative easing (QE). To date, the Bank has created £200 billion of magic money and used this to buy government bonds from banks and other institution. In effect, this has increased the money supply, helping to keep bond yields low and borrowing rates down.

Alas, this huge injection into the economy cannot keep going indefinitely. This year's £200 billion shot in the arm works out at about an eighth (12.5%) of the UK's GDP (Gross Domestic Product). Eventually, when QE ends, this patient is going to experience a nasty form of economic 'cold turkey'!

Are you worried about the future?

If you're worried about the future, the worst thing to do is to bury your head in the sand. If you've got debt, adopt our goal: Destroy your debt. If you haven't, adopt our goal: Build up your savings. Watch our video on how to... save even if you've got no money. Then, have a wander over to Q&A and ask other lovemoney.com readers for their help on the financial issues which worry you the most.

Finally, if you're interested in more features like this one, why not subscribe to Ed Bowsher's blog for the regular comments on the latest economic news? Read Ed's blog.

More: Find a low-rate mortgage | House prices won't fall for years | Stop the recession damaging your health