A Chill in Britain

London - Don't tell Alex Ciangola that Britain's recession may soon be over. Sure, stocks are soaring and home prices are ticking up, but that's not translating into a rebound at Eclipse Hairdressing, Ciangola's chain of four tony salons. His customers are spending about 25% less on haircuts and color, and he has been forced to let his staff shrink by about the same amount, to 27 people today. "It's been a very difficult year," he says.

Until recently, Britain's was the star of Europe's big economies. It grew at an annual average of 2.5% from 2000 to 2008, eclipsing Germany's 1.5% annual pace and France's 1.9%. But while the Continental powers emerged from recession in the second quarter, the British economy continued to contract, shrinking by 0.4% in the third quarter. For the year, Britain's gross domestic product is expected to fall 4.7%, and pessimists say its high debt levels and dependence on financial services mean it will struggle in 2010. Crippled banks are unable to extend much credit, and household debt stands at more than 150% of income, so consumers will be reluctant to spend.

While big companies can still borrow in the bond market, small businesses—the chief job creators in good times—can't get financing. Weather Front, an online retailer of weather instruments in the coastal town of Eastbourne, had wanted to improve its Web site to prepare for an economic rebound. But owner Alistair Barron couldn't get a loan to pay for the upgrade and has since laid off two of his 10 employees. "By next summer we would have had a much bigger offering," Barron laments.

A surprisingly rigid labor market is also keeping a lid on growth. As British companies have avoided mass layoffs, unemployment has climbed to just 7.8% from 5.8% a year ago. That's good for workers, but it means productivity has fallen, so some economists are predicting further job cuts, which would delay any recovery. "The British labor market has performed far more like its German counterpart than its American cousin," says Danny Gabay, director of Fathom Financial Consulting in London.

The news isn't all bad. The City of London, Britain's financial center, is starting to hire again. Money is also pouring into commercial real estate, pushing prime property values up by 5% to 10% in recent months, says David Atkins, CEO of Hammerson, which has an $8 billion portfolio of big buildings. Rents, though, have yet to catch up as retailers and other businesses, he says, "still face significant challenges."

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