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The buck passing has already begun.
Gordon Brown said yesterday that 2008 will be a "decisive year for the economy". (I think it's fair to assume that in this case, decisive' is politician-speak for nightmarish'). Now he wants us all to judge him and his government "on whether we take the right long-term choices for the British economy" in the long 12 months ahead.
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It's a clever move, an attempt to wipe the slate clean, as though the previous ten and a half years or so of his Chancellorship had nothing to do with the state the economy's in now.
I imagine we'll see a lot of finger-pointing this year the Bank of England has already taken the flack for Northern Rock. Now poor Americans, careless bankers and bloated City fat cats will be blamed for starting the credit crunch, and Britain will be told that it's up to Big Gordon to clean up the mess. It's a classic attempt to erase history and start with a clean page Stalin himself would be proud.
But Mr Brown won't be able to find a clean page that easily he's spilled far too much red ink for that
Why life is getting much more expensive
Gordon Brown is right to say that 2008 will be hard for the British economy. Our country's growth over the past ten years has been founded on overly cheap debt, supported by statistical fiddling and cheap goods from China.
Now debt is becoming more expensive and so are the cheap goods from China. A Bank of England report last week showed that since the credit crunch, lenders have cut back sharply on their willingness to dish out more money. And that's showing itself already in rising mortgage costs. In November last year, the average mortgage rate was 6.02%, the highest in seven years, up from 5.94% in September. Credit card rates have jumped too.
Meanwhile, the Chinese are steadily tightening their monetary policy in response to rapidly rising inflation. As life becomes more expensive in China, that ability of manufacturers to pump out cheap goods for the West is coming under pressure.
And of course, with sterling weakening rapidly, general inflation is set to become more of a problem. When the pound was at $2.10 a few short months ago, rising oil prices didn't seem to matter quite as much as oil is priced in dollars, a strong pound kept the impact to a minimum.
But now that the pound is sharply lower against the dollar, suddenly $100 a barrel oil looks a lot more painful, and those Chinese imports start to become more expensive too.
We're already seeing these costs pass through to consumers, just as rising debt servicing costs squeezes them on the other side of the equation. Fuel surcharges on flights are rising; food suppliers and supermarkets are set for an almighty battle in the next couple of months over who pays for higher food costs; petrol is more expensive; and energy bills are about to jump yet again Npower raised rates on Friday, and British Gas is set to do the same this week, reckons The Telegraph.
A tough choice for the Bank of England
Higher costs mean rising inflation. Higher debt costs mean slowing growth. That means the Bank of England has a tough choice on interest rates this week, but either way it loses. Cut rates, sterling falls, and inflation gains the upper hand. Keep rates on hold, and asset prices will keep falling, there will be a mass outbreak of whingeing in the City, and huge political pressure will be brought to bear on the Monetary Policy Committee.
I'd say it's better to keep rates on hold and at least attempt to resist inflation but judging by central banks' actions across most of the rest of history, the MPC will chase short-term comfort at the expense of long-term stability, and cut rates sooner rather than later.
But none of this should be a problem. After all, the UK has just been through its longest period of growth in history, or so the GDP statistics say. And the Government has been the biggest beneficiary of all that. Nobody got more out of the housing boom than the Government - almost everyone pays stamp duty these days, and more and more people have been sucked into the inheritance tax net.
The Government has also done rather well out of rampant oil prices, raking in tax from both consumers and the oil producers. And then there's the boom in the City, which also made a tasty packet for the Treasury, despite the perception that Labour has given the Square Mile an easy ride. Then of course there's all the tax increases that have hammered the rest of us over the past decade.
So there should be plenty of money left in the coffers to pay for tax cuts and increased public spending and all sorts of things to prop up the economy during the hard times.
Don't expect gratitude from the public sector
Except there isn't any money left in the coffers at all in fact, the Government is massively in debt. Why? Because Mr Brown spent all the money and more on inflating an already unsustainable boom even further by splurging on huge public sector pay rises, with little corresponding service improvements to show for it.
Now, with no more money in the pot, he's having to demand that the same public sector employees who've enjoyed his largesse for ten years suddenly rein in their pay demands to below-inflation levels. He might have thought that they'd be grateful after the boom years but not a bit of it. Suddenly there's talk of strike action in the air just when he, and the UK, needs it least.
So forget about what Mr Brown does this year he already made the big decisions that will make this a horrendous year for the British economy a long time ago.
Turning to the wider markets...
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Stocks plunge on US jobs data
In London on Friday, weak US jobs data saw the benchmark FTSE 100 take an afternoon tumble of 130 points to end the day at 6,534. The broader indices were also lower. Retailers including Next, Kingfisher and Home Retail Group continued to dominate the fallers. Amongst the small caps, Land of Leather lost nearly 50% of its value after it warned that results would be well below expectations.
Elsewhere in Europe, stocks also ended the day lower. The Paris CAC-40 closed down 99 points, at 5,446. And in Frankfurt, the DAX-30 also fell 99 points, ending the day at 7,808.
On Wall Street, the latest jobs data - which showed the weakest monthly growth in four years in December and appeared to confirm an economic slowdown is already underway- prompted heavy falls across the major indices. The tech-rich Nasdaq suffered its sharpest drop since February 2007, ending the day 98 points - or 3.8% - lower, at 2,504. The Dow Jones fell 256 points to close at 12,800, led by tech stock Intel. And the broader S&P 500 was down 35 points, at 1,411.
In Asia, the Japanese Nikkei fell 190 points to close at 14,500 today, its lowest level in 17 months. And in Hong Kong, the Hang Seng was down 340 points, at 27,179.
Oil falls on demand concerns
Crude oil had fallen back further from last week's peak of above $100 this morning on investor concerns that an economic slowdown would reduce demand, and was last trading at $97.44 a barrel. In London, Brent spot was at $96.75.
Spot gold had fallen back to $857.10, from $862.00 in New York late on Friday. And silver was also lower, at $15.29.
Turning to the forex, the pound fell to its lowest level since last August against the dollar this morning - $1.9654 - before edging back up to $1.9730, and was hovering near all-time lows against the euro too, last trading at e1.3430. The dollar, meanwhile, was at 0.6806 against the euro and 109.23 against the Japanese yen.
And in London this morning, a survey from accountants BDO Stoy Hayward revealed that business confidence in the UK has fallen to its lowest level since January 2006. The gauge fell to 100.1 in December, from 100.4 in November, driven by a slump in the service sector.
Finally, our recommended articles for today...
Too much risk, too much reward
- Pre-eminent 1980s economist Henry Kaufman has criticised the combination of transparent monetary policy and financial market opacity that has fuelled asset bubbles and undermined stability. Where did it all go wrong? Yves Smith looks at the dangers of short-termism and excessive risk-taking: Too much risk, too much reward
We need Kingsnorth - but we need nuclear power more
- Gordon Brown should ignore Greenpeace's objections to plans for a new coal-fired power station at Kingsnorth, says Garry White. It's vital that we ensure our future energy independence. For more on the problem with the UK's energy policy, read: We need Kingsnorth - but we need nuclear power more
