There was a glimmer of hope last week because interest rates did not rise after the German central bank's meeting on Thursday. What became clear, however, was that even if interest rates were not about to rise, they were not going to fall either. The next move in mortgage rates may even be upwards over the next few days or weeks, with a devastating effect on house prices.
This will do nothing to encourage consumers. For nine of the last ten months, credit card holders have paid back more than they have borrowed. But there is still pounds 30bn of consumer debt outstanding. With such a huge overhang of debt, a consumer boom, the key to stimulating the economy, cannot happen.
The financial markets are deeply pessimistic. The news that interest rates were not going to rise and that a sterling crisis had been averted made no impression. Instead, the stock market fell on Friday by 52 points, making a drop of 300 points on the FT-SE 100 Share Index since May.
The markets are thus saying that they have given up hope of a significant upturn. They believe interest rates in other European countries are likely to rise and economic growth in countries such as Germany and France to fall. This has grim implications for Britain which is already in a deeper recession than most Continental economies.
Economic forecasters have been predicting for several months that Britain's economic growth this year will be roughly zero. Since there was actually 'negative growth' in the first half of the year - a fall in gross domestic product - economists were expecting a counterbalancing positive growth in the second half. Now, however, the forecasters are less sure.
The signs are patchy but hard to ignore. Manufacturing output has slackened over the last few months. Sales on the high street have slumped even further, with some of the biggest retailers such as John Lewis experiencing their worst June on record. Recent surveys show a slide in confidence among businessmen.
We are still a very long way from a Thirties-type slump. We appear to be entering an era of low inflation and virtual economic stagnation. Even on the most optimistic view, the economic indicators show that recovery in recent weeks has been faltering. And the more often hopes of a recovery are dashed, and the longer an upturn is delayed, the more corrosive is the effect on business confidence. The plain fact that the recovery is failing to materialise may already be pushing the economy further into recession.
Sterling crisis, page 10
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