Is UK heading Towards Recession?

Recent data suggests that the UK’s long record of unbroken economic growth may, at last, be coming to an end. The latest snapshot of the UK economy presents a relatively good economic situation; however, this mask a variety of data suggesting the economic situation is sharply deteriorating.

The Bad News on the UK Economy

• Falling disposable incomes due to rising oil and energy prices
• Falling house prices. Falling house prices reduce consumer wealth, consumer confidence and the ability to remortgage. Rising house prices have long sustained UK economic growth, but, now prices are falling, the opposite is occurring.
• High Street Sales slumping. M&S has reported a series of disastrous results. Food sales fell by 4.2%, clothes sales by 6%. The problems of M&S are revealing because M&S targets the luxury end of the food market. It appears that price is becoming the important factor in consumer shopping. The likes of Netto and Aldi are likely to do fine in a recession as they target the best value, rather than selling the most expensive organic food at any price.
• Rising Mortgage Costs, despite base rates staying the same. The credit crunch is forcing up the cost of fixed rate mortgages.
• Rising inflation could even force the MPC to increase interest rates, a sure way to make the downturn worse.
• High Levels of Consumer Debt. For several years we have benefitted from high consumer confidence which has encouraged record levels of consumer debt both secured and unsecured. As confidence in the economy falls, consumers are likely to try and increase their savings ratio, leading to a fall in consumer spending.
• Government Borrowing is likely to increase to £60 billion, well above the governments target, leaving no room for expansionary fiscal policy.

The Good News on UK Economy

• A technical recession is negative growth of two consecutive quarters. This is still unlikely. Although many feel that growth of less than 1% is effectively a stagnating economy.
• The commodity price spike inflation can’t last for ever. When price rises moderate, disposable incomes will recover again.
• Recessions are an inevitability of a modern capitalist economy. We have avoided a severe downturn since 1991; evidence suggests this downturn will not be as severe. - There is no necessity for interest rates to rise to double digits as they did in 1991.
• A falling pound will help boost exports.

Related

• Are falling house prices good or bad?
• Mortgage woes lead house prices lower