The UK is the most vulnerable economy in the G7 because the financial sector is so important, because the housing boom was so large and because household debt is sensationally high, and we are also highly dependent on the rest of the world which is suffering a recession too. And our underlying fiscal position related to these vulnerabilities is much worse than anyone thought 2 years ago.It's interesting that the fact of a recession is the problem - that is, a reduction in GDP, rather than the actual level of output or consumption. If the UK has benefited (as it undoubtedly has) from huge growth in the financial sector and housing-related investment over the last ten years, and we now have a brief slowdown from a peak of economic activity, you might think it isn't something to regret.
Politicians undoubtedly get that there is a massive cyclical downturn, but people don't get that it's a structural change. 2006 is not coming back with its consumer-led debt boom driven by the English-speaking countries. We might get back to past growth - I hope we will - but the world will have to be rebalanced. Governments are doing a good job of short-term stimulus and saving the banking system. A sensational level of stimulus! But for stability, healthy private sector demand is needed. Lots of changes are needed that China, the US and UK don't yet get, but they are essential in getting back to a healthy economy.I guess the message here is that China is storing up too many claims on the US and UK economies, which are likely to lead to problems in the future. The US and UK (among other countries) are consuming China's output now, and instead of paying for it now by exchanging our own services, we are exchanging promissory notes to pay later. Fair enough, and the Chinese are willing to let us do it, but there must be a risk in this.
Just as some private borrowers will keep borrowing as long as the lender is willing to stump up, but when it is time to repay, start quibbling. Have you come across those services which supposedly allow you to write off your consumer debt by challenging the terms and conditions under which it was lent? I feel there's something basically dishonest about that course of action, but perhaps there is an analogy.
So perhaps we need to figure out what we have to offer the Chinese consumer. China does buy a lot of investment goods from the West - industrial machinery, software and other technology - but fewer consumer goods or services. Perhaps we have expertise in media, well-designed and marketed consumer goods, high quality food and consumer infrastructure that they would be interested in. But I don't know what policy routes Martin would suggest that governments take to stimulate trade in these goods.
[The changes are beyond most people's understanding] We need to protect emerging economies now - change the way we finance them and expand the IMF; and have a serious, intelligent dialogue with the Chinese to make their growth more compatible with the global economy - the US and UK need to change too, and make the world financial system work better - because it has worked terribly.