UK now 'in deep recession' - economy will shrink by 4% this year

Further confirmation (if any was needed) of the worsening of the UK's economic position. The governor of the Bank of England, Mervyn King, has warned that the UK is "in a deep recession" in 2009 and said rate cuts may no longer work and hinted thta 'unconventional' measure may have to be used. In its latest forecast for economic growth and inflation, the Bank says that the UK economy will decline sharply in the first half of the year. And it says that there is a significant risk that the recession will be even longer and deeper than expected. The Bank forecasts the economy will shrink by 4% from mid-2008 to mid-2009.

Link to BBC News

What do you think Mervyn King meant by 'unconventional' measures?

Local impact of the downtown

The FT has produced an interactive graphic that looks at the local effects of the global slowdown.It shows you how the different regions of the UK are coping, highlighting the declines in house prices, the rise in unemployment and the escalating numbers of corporate insolvencies. (Link)

News of recession dominates

Numerous articles in The Observer today about UK economic prospects ... namely that the recession is upon us. The Ernst and Young Item Club will warn this week that we are in the grip of a severe economic slowdown at the same time as GDP figures are widely expected to confirm that a recession is already underway. Item expects GDP to decline outright next year by 1% - the first full year of decline since 1991. It predicts a gradual recovery in 2010, with the economy recording growth of just 1%. Consumer spending would be hard hit over the next two years, as households try to rebuild their finances in the face of sickly income growth and plunging property prices. Link to Ernst and Young There isa good report of the forecast on the BBC News site. Link

There is an interesting view of the likely impact of the recession and the suggestion that it will be nothing like the one that gripped Britain in the early Eighties. It will hit people in different industries - finance and leisure, not manufacturing. And London, not the North, will bear the brunt. Link: It's grim down South

Will Hutton highlights that aspect of a recession that has the most impact on individuals - unemployment. 'Over the good years unemployment came to be characterised as a matter of choice; there was work out there if you wanted it or could be bothered to get out of bed. It has been a controversial argument; worklessness has always been part of a vicious circle of self-reinforcing lack of self-worth and poverty of opportunity, tending to be clustered in areas of deprivation. It is rarely if ever a matter of choice. People want to work. Human beings want to realise our potential and dreams. Work provides sustenance, meaning and structure to our lives. It is where we meet the bulk of our friends and partners. In a recession the argument that the unemployed are unemployed by choice will not wash. To stand idly by is to condemn our fellow citizens to poverty, futility and meaninglessness.' It is the young (school and college leavers, new recruits) who have yet to show their usefulness and to acquire new skills who are affected first. He goes on to outline measures which should be taken to inject spending power into the economy, the quickest and most effective, ironically, by putting cash into the hands of the unemployed. Raising unemployment benefits and increasing cash payments should be a priority - it is not just that need the cash but that they spend it the fastest. The next most effective measure is to increase spending on the national infrastructure. Link to article

See Geoff Riley's excellent blog (Could the UK budget deficit reach £100bn?) for an overview of current government borrowing and the National Debt.

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?

Bad news for Ireland and New Zealand

With all attention on the UK and US economies at the moment it is easy to ignore developments elsewhere. It is reported thet the Irish Republic's economy has fallen into recession after shrinking for a second quarter in succession. The Central Statistics Office (CSO) said gross domestic product (GDP) had contracted by 0.5% in the three months to the end of June. The economy had shrunk by 0.3% in the first quarter of the year. It is the first time Ireland has experienced a recession since 1983. The economy is now facing its most difficult period since high unemployment and emigration hit in the early 1980s.

The New Zealand statistics agency says the economy has gone into recession for the first time since 1998. Gross domestic product shrank 0.3% in the first quarter, and 0.2% in the second quarter this year. But annual growth until June remained positive. New Zealand is suffering from the global credit crunch, rising food and fuel prices, and drought which cut production in agricultural industries.

Links: Irish economy goes into recession

New Zealand slips into recession

What is the technical definition of a recession? What key features characterise a rescession?

Further evidence of economic slowdown

Numerous reports overthe past few days have confirmed a significant economic slowdown. The Chancellor, Alistair Darling, has said that there is "no doubt" the UK economy is slowing and has warned it will be a "difficult year" ahead. He warned of the dangers of allowing inflation to increase, calling for pay restraint to prevent the development of a wage-price sprial, so familiar to economics students of my generation. He pointed out that fuel and food price increases were hitting consumers. (Link to details)
This follows the warning from the CBI that 'the economy will grow at its slowest pace for 17 years.' The CBI's quarterly economic outlook shows that the employers' body has lowered its forecast for GDP growth in 2009 by 0.4% to 1.3%. The slowdown in consumer spending is set to intensify, says the report, pushing consumption growth down to 0.7% in 2009, the lowest level since 1992. (Link to details of the survey)

An indicator of the economic situation, contruction, was also under the spotlight with the news that the number of new houses being built had slipped to its lowest level since 1945. The biggest reason for this appears to be the inability of potential buyers to obtain mortgages. (Link to article)

Investment and growth

The Economist reports that the biggest investment boom in history is under way. Over half of the world's infrastructure investment is now taking place in emerging economies, where sales of excavators have risen more than fivefold since 2000. In total, emerging economies are likely to spend an estimated $1.2 trillion on roads, railways, electricity, telecommunications and other projects this year, equivalent to 6% of their combined GDPs—twice the average infrastructure-investment ratio in developed economies. Largely as a result, total fixed investment in emerging economies could increase by a staggering 16% in real terms this year, according to HSBC, whereas in rich economies it is forecast to be flat. Such investment will help support economic growth this year as America's economy stalls—and for many years to come.

Infrastructure investment can yield big economic gains. Building roads or railways immediately boosts output and jobs, but it also helps to spur future growth—provided the money is spent wisely. The infrastructure boom has global implications. Increased investment means more imports of capital equipment, which will help to slim current-account surpluses in China and elsewhere, and so reduce global imbalances. Rising demand for building materials will keep commodity prices high. Last, but not least, will be the negative impact on the environment. An expected 75% increase in emerging economies' electricity demand over the next decade will worsen air pollution and global warming. (Read full article here)

OECD highlights inflation worries

The Organisation for Economic Co-operation and Development (OECD) has said inflation remains a danger, as oil prices have shown a sharp increase. "Ministers were concerned about inflationary pressures and indications inflationary expectations may be drifting upwards," the OECD said. They also said attention should be paid to fiscal balances, especially where inflationary pressures remained high. It also believes that the British economy is entering a period of "significant down-swing" that will see it grow even more slowly in 2009 than this year and house prices will fall further.
In its half-yearly economic outlook, the OECD was particularly downbeat about Britain, predicting that the economy would only expand by 1.8% this year. That rate will drop to 1.4% in 2009 - the lowest since 1992, when Britain was in a deep recession, and half the pace of 2007. (Details - click here)

Crunch closes north-south growth divide

The north-south growth divide will close for the first time in six years as the credit crunch takes its toll on the City, a report out today shows. The difference will disappear next year for the first time since 2002 as London's economy slows down, said Experian, Britain's leading credit reference company. The south has been growing 1% a year faster than the north but this will change over the next couple of years as the credit crisis and consumer slowdown take their toll, especially on financial and business services. London's growth in average output per head - also known as gross value added (GVA) - will fall to 1.5% in 2009 from 2.3% the previous year. In the north-east, GVA will increase to 1.2% from 0.9% the year earlier. "London will see greater falls as it has a much greater share of GVA than the north," said Andrew Goodwin, managing economist at Experian. Read the article here.

What are the implications of a 'two speed economy'?

No UK recession, economists say

Britain's economy will remain shaky but will narrowly avoid recession as long as another Northern Rock is not around the corner, according to a report out today. The prediction, from the National Institute of Economic and Social Research (NIESR), comes after data released yesterday showing that activity in the country's manufacturing sector declined in April to its second-lowest level in two years. NIESR forecasts that growth will weaken to around 1.8% this year and next, from 3% in 2007, as a result of the credit crunch and soaring oil prices.

No recession, economists say - provided there are no more Rocks

How reliable is this forecast? Does it agree with other recent forecsasts?

UK growth lowest for three years

Economic growth in Britain has slowed to its weakest in three years, official data showed today, as last year's interest rate increases and the credit crunch take their toll. The Office for National Statistics said the economy grew 0.4% in the first three months of the year, down from 0.6% in the final quarter of 2007.

http://www.guardian.co.uk/business/2008/apr/25/gdp.growth
http://news.bbc.co.uk/1/hi/business/7366534.stm

What will be the effects of slower growth? Is this news likely to affect the interest rate decision of the Monetary Policy Committee(MPC) when it next meets?