Panic in the markets...and bad news from the UK economy

Continued focus this morning on the financial markets following the failure of the US Congress to agree the financial rescue package. Tutor2u highlights some of the reaction and the detailed press coverage (all worth a read!).

Alongside this, almost unnoticed, further bad news about the UK economy which saw no growth in the second quarter of 2008, while the gap in the current account widened to its highest level in almost a year. Data from the Office for National Statistics (ONS) showed economic output remained the same as in the first quarter, confirming previous estimates. Growth was 0% in the second quarter - which was even lower than the 0.3% figure for the first quarter of 2008. Separately, balance of payments information showed there was a deficit of some £11bn in the current account in the second quarter. The current account deficit - which is the difference between imports and exports - widened by more than had been expected to £10.98bn, compared with £5.49bn in the first quarter. This is the biggest the deficit has been since the third quarter of 2007 and it equates to 3% of GDP. (Link: UK confirms economy at standstill )

This added to the news yesterday that new mortgage lending collapsed in August, according to the latest figures from the Bank of England. Banks and building societies lent an extra £143m in home loans last month, just 5% of July's lending figure and only 2% of the lending in August 2007. August is traditionally the quietest month for house sales. But house buyers may have been put off buying properties because of the continued fall in prices and widespread predictions of an imminent recession. (Link: Mortgage lending slumps)
The fall in house prices has accelerated in England and Wales, according to the Land Registry. Its latest report shows that prices fell by 1.9% in August, taking the annual rate of price deflation to 4.6%. (Link: House price fall 'accelerating')

All of this raises interesting questions about how we behave when we think there is going to be a recession. What will be the effect on growth if we decide to postpone consumption? What would we expect to happen to the balance of payments if we enter a recession? Why has there been an increase in the current account deficit at a time when the economy is slowing down? Will this news encourage the Monetary Policy Committe to lower interest rates?