London falling

Once ranked as the strongest economy in Europe, the UK has enjoyed an unprecedented boom since 2001, but it's now facing a long, protracted recovery

It was once regarded as the strongest economy in Europe. Now the IMF predicts the UK is the weakest in the developed world, with any recovery likely to be slow and long.

Last week’s record interest rate reduction to two percent may have helped borrowers, but it did little to restore confidence. The UK Government confirmed on Wednesday that the Treasury and the Bank of England were together looking at a range of options, including ‘quantitative easing’ – the printing of new money. Where did it all go wrong? 
The answer lies with the country's financial heart - the City, the financial services industry and government.
 It is no coincidence that the contribution of UK financial services to GDP grew from five percent to 10 percent between 2001 and 2007. 
2001 was a significant year for London.

Shortly after it rose to replace New York as the financial capital of the world – partly because of two major catastrophes: the 9/11 terror attacks and the collapse of the Enron Corporation. 
Both events in 2001 triggered major changes in the US, which included the tightening of internal security and, more importantly, tougher financial regulations. 
These restrictions forced many US and foreign investors to London, where rules and regulations were being eased, not tightened. Successive governments since Margaret Thatcher had played a hand in these changes. But the then Chancellor Gordon Brown was a big part of the City’s deregulated success post 2000, and he is now as much a part of its downfall.


Figures in 2005 showed that the trading zone from Canary Wharf to The Square Mile accounted for only seven percent of global funds under management, but its importance as an offshore centre was significant.


Billions of pounds were legally held offshore that never appeared on London balance sheets. 
London became the main global secondary bond market as well as the location for almost 50 percent of the derivatives market. Foreign-exchange trading was vast, and The City managed almost 80 percent of all European hedge funds. It had become that most attractive market of all – a deregulated zone.

Big businesses brought with them investment funds and virtually unlimited amounts of capital to put into the booming real estate market, as well as innovative and fledgling British companies. 
The City was awash with cash and profits. Both those two things disappeared overnight when investors realised toxic sub prime loans from America had infected the world’s financial system to its core. And London was its heart.   


The UK’s Chancellor's pre-budget report in November, 2008, stated that UK debt would hit £1 trillion over next few years. 
Latest figures released by the UK’s Office for National Statistics show at the end of October, 2008, public sector net debt was £640.9billion, representing 42.9 per cent of gross domestic product.


Unemployment is growing. 
The National Institution of Social and Economic Research (NISER) predicts the UK economy will fall by 1.5 percent in 2009, and unemployment could hit a high of 2.5 million by 2010.


There are now fears over the possibility that printing presses could start producing more cash. The pound is falling to record low levels.


Only when business investors regain confidence and begin spending real money, can UK Ltd recover. It may take some time.