The U.K.'s terrible second quarter growth numbers released this morning, minus 0.7 percent, are proof that you don't have to be in the euro area to be in serious economic trouble.
Prime Minister David Cameron's rivals in the Labour Party were quick to seize on the numbers as further evidence that the government's austerity strategy has failed, driving the economy into a downward spiral instead of instigating growth.
There's some uncertainty about the figures, which are based on less than 50 percent of data, but it does look bad. The U.K.'s economy is now 0.9 percent smaller than it was when Cameron came to power in 2010, and his plans for cutting the deficit are dust, given that they were based on significant levels of positive growth.
The best Cameron could do in response to the growth figures was to call the rout a reflection of the U.K.’s "deep-rooted economic problems." The government has begun to take some measures to try to goose the economy, but it looks like far too little to make an impact, given the headwinds from the euro area.
Cameron's right about the depth of the U.K.'s troubles, though. Debates about austerity versus stimulus sometimes gloss over the question of how deep is the hole that has to be climbed out of, and the U.K.'s hole is one of the deepest, according to a McKinsey & Co. paper from earlier this year on the deleveraging challenges faced by the public and private sectors of different economies.
Based on 2011 figures, the biggest debtor among Europe's larger developed economies wasn't Spain or Italy; it was the U.K. -- at 507 percent of GDP, second only to Japan's 512 percent among the 10 largest developed countries. The composition of the U.K.’s debt reveals the problem: The U.K.'s financial sector accounted for 219 percentage points of the total.
U.K. taxpayers will suffer for a long time yet, with or without government stimulus. The International Monetary Fund recently said the government had leeway to loosen its fiscal policies, but Cameron must be working within some tight margins. Ten-year gilts yield about 1.5 percent, just a fraction more than U.S. Treasuries, about 1.4 percent. There's debate over whether markets would stop buying U.K. debt if they felt the government was abandoning its debt reduction program, but Cameron and his team won't take the risk lightly.
Spain, whose borrowing costs are above 7 percent, has less government debt as a proportion of GDP than does the U.K. And as bad as the U.K. outlook is, it wouldn't want to trade places with Spain.
(Marc Champion is a member of the Bloomberg View editorial board. Follow him on Twitter.)
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