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  • Ian Ritchie : Business AM

The sting in the tale of the recession-free recession

The property boom is fooling many people into thinking that they are better off

AS EVE SAID TO ADAM on being expelled from the Garden of Eden, “We seem to be living through a time of unprecedented change”. Well, the times of unprecedented change are back, and how!

Economic cycles come and go, but somehow this one seems very different. We appear to be in a new kind of economic slump: a recession-free recession.

Confidence in the economy and investment levels has rarely been poorer, but the shoppers continue to flock to the stores. And it is not just small purchases, even car manufacturers are reporting year-on-year growth. Businesses are sluggish, profits are down and investment and capacity are being cut, but unemployment remains low and inflation and interest rates are modest. It is the most bizarre and puzzling of times.

The last time the economy took a dip, in the early 1990s, consumer spending dropped in sympathy. But this time, when the going has got tough, the shoppers have gone shopping.

The stock markets are having a nervous breakdown. What we had thought to have been a decade-long bull market starting in about 1992 has turned out to have been mostly smoke and mirrors and is now in fast rewind. Values are already back at 1996 levels and there is little confidence that the floor is yet under our feet.

When the dotcoms went pop, at first it seemed to have been a “normal” market bubble, rather like the famous railway or tulip bulb speculations of the past. But, no, it turns out to have been something rather different. The froth has been blown away, but we are still not sure about the measure of what is left.

The level of creativity shown in financial engineering and analyst reporting of corporations in the past few years has often exceeded that of the creativity and enterprise of the companies themselves. And it’s not just the new, high-growth, dynamic companies that are under scrutiny. These days, we cannot be sure about the financial reporting of some of the world’s largest corporations.

And this recession-free recession that we are going through has some odd characteristics. Normally, when times are tough economically, it is the poor that suffer the most and, somehow or other, the rich manage to escape the worst of it.

This time round it seems, on the face of it, to be the other way round. As far as the majority of the general public is concerned, times are not particularly hard.

Unemployment is not a particular worry and, because inflation has also been low, people feel reasonably well off. Can it really be the rich that have suffered most? Last year in the US, $2 trillion (fl.7 trillion) was wiped off the value of companies on the main markets, and a lot of that money came straight out of the portfolios of the wealthy. The man in the street, who didn’t have any direct investment in equities, hasn’t really noticed the loss.

But this 'Robin Hood recession' - robbing only the rich - isn’t really as it seems.

Most people have actually lost quite a bit of personal wealth over the past year, but the extent of their loss is not visible to them. It has hit hard at the value of the portfolios held by their pension schemes - impoverishing them in the long term.

What has masked this has undoubtedly been the strength of the property market. When people hear that the value of their home has gone up, they feel richer. This is pretty daft because, usually, they have no intention of selling their home — or, if they do, it is usually to buy an even more expensive one.

What they are doing, in their droves, is borrowing against the rising value of their properties. Last year, £8.lbn was loaned in the UK for non-property purposes, but raised on the back of mortgages. The banks and building societies are delighted to book this business, which gets them an excellent return and is relatively low-risk. Once people realise that their house is at risk, they tend to make the repayments.

So the current consumer boom is entirely unjustified by the state of the economy. It is fuelled by property valuations, which cause people to feel well off and are insufficiently tempered by the fact that we have all got a fair bit poorer.

Can things go on this way much longer? Surely not.

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