UK turning into a globalization loser: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

LONDON (Reuters) - Britain, one of the big winners from the free flow of capital and services globally in the last decade, is rapidly becoming one of globalization's losers due to its reliance on property and finance.

With financial services contracting and the international flow of capital that funded a debt binge in an almost total freeze, Britain's economy, housing and financial markets are in a headlong race lower that makes problems in the United States seem slow moving in comparison.

Britain's famously open economy has had a stunning run of uninterrupted growth over 15 years, as it successfully transformed itself into a services and consumer society. The City of London financial centre boomed, arguably winning pre-eminence over New York, while international capital from Russia, Asia and the Middle East found a base in London.

At the same time Britain's regions enjoyed smaller-scale but still buoyant growth, much of it connected in one way or another with a near tripling in property prices over a decade.

Now the shutdown of the flow of international capital to its banks and borrowers has brought that to a halt, while a spike in the cost of energy and food hurts consumers.

It is really rather difficult to give a sense for exactly how quickly Britain's economy is coming unglued.

According to the Nationwide building society house prices fell by 2.5 percent in June alone, and some economists are now forecasting multi-year falls of as much as a third. Mortgage lending is down by 64 percent year on year in May, as banks recoil from lending into a falling market and also due to the simple fact that Britons collectively don't deposit enough to cover their borrowing needs.

John Lewis said sales at its department stores dropped 8.3 percent in the week ended June 28, compared with the same week a year earlier, while rival Marks & Spencer (MKS.L) also reported disappointing results, driven in its case partly by Britons choosing less expensive food.

The banking sector is racing to recapitalize, not entirely successfully, with mortgage specialist Bradford & Bingley's shares now trading well below the level at which a new offering of stock was underwritten.

Construction activity fell at its fastest pace in at least 11 years in June, while the crucial services sector shrank at its sharpest rate since just after the September 11 attacks on the United States.

Even manufacturing contracted in May, according data released this week, though to be fair it would almost take an industrial revolution for Britain's small sector to make up for shortfalls in property, consumption and finance.

The upshot is that Britain is very likely already in recession, and that its financial markets, though hard hit already, have further to fall.

SECURITISATION AND ITS DISCONTENTS

So how will the UK experience of a property bust stack up against the United States?