Economy heads for recession as growth slumps
Friday, 25 July 2008
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After years of boom, official figures on the economy published today will show that growth has slumped to nearly zero, leaving the nation already in, or close to, recession.
The Office for National Statistics figures for growth during the second quarter of this year are forecast to show a rise of between zero and 0.3 per cent on the first three months of 2008. That would push the average annual growth in the economy down from 2.3 per cent to about 1.6 per cent – the sharpest deceleration since 1995.
Yesterday, the deputy governor of the Bank of England, Charlie Bean, warned that "there is a risk that the credit crunch leads to a deeper and more prolonged slowdown".
Especially bad retail sales figures for June, after a freakishly good showing the previous month, confirm the dismal picture emerging from the high street as household budgets are tightened and confidence evaporates. Sales were down 3.9 per cent on the month – the worst figure since the series began in 1986.
The only bright spot is exports, helped by a massive 12 per cent depreciation in the value of sterling since last summer. But that will not be enough to save the economy from further woe, as consumption, investment, the housing market and the public finances are all set to worsen. Unemployment is already increasing, a critical factor in preserving consumer confidence.
City economists are falling over themselves to slash their forecasts, citing surveys of depressed business confidence as key leading indicators to troubles to come.
Amit Kara, of UBS, believes Britain is "very close to recession territory", and Alan Clarke, a UK economist at BNP Paribas, said: "I think there will be recession from the third quarter of 2008 onwards. The survey data are consistent with stagnant GDP growth as of June. The things that have dragged down survey indicators (rising costs and weakening demand – the confluence of which has severely squeezed profits) have intensified. This suggests bad news for the second quarter and worse news ahead."
Matt Sharratt, of the Bank of America's economics team, added: "With the sharp slowdown in sales in June, tightening credit conditions and severe correction in the housing market, the second half looks like it is shaping up to be one of real economic weakness. We expect the economy will almost grind to a halt over the coming few quarters." This week, David Blanchflower, a member of the Bank of England's Monetary Policy Committee, declared that: "I think we are going into recession and we are probably in one right now."
Meanwhile, rapidly increasing inflation may force the Bank of England to raise interest rates from their current level of 5 per cent, another blow to a property market enduring a two-thirds decline in the number of mortgages approved and a halving in the normal level of transactions.
House prices are 8 per cent off their peak last year, with a similar fall widely expected over the next 12 months. The credit crunch, behind so much of the present economic crisis, shows few signs of abating; credit is still scarce and expensive.
The Treasury is standing by the forecast it made for growth in the Budget, of between 1.75 and 2.25 per cent this year and a range of 2.25 to 2.75 per cent for 2009, but next year's figure is looking ludicrously out of step with events. A downgrade, likely to be made in this autumn's pre-Budget report, will have serious implications for the public finances and the Government's fiscal rules.
The "sustainable investment rule" in particular, which holds government net debt to 40 per cent of GDP, is rumoured to be under revision; a halving of the Treasury's growth forecast would, according to the National Institute for Economic and Social Research, leave net debt peaking at 44.4 per cent of GDP in 2010-11.
