Is Recession in UK Likely?

On my Economics Blog, I wrote a piece trying to explain the current economic difficulties in the US.

The worrying thing for the UK, is that we share many similarities with the situation in the US. Although a UK recession is still less likely there are several similarities between the two economies.

Boom and Bust in Housing Market.

US house prices increased much faster than incomes. This was due to various factors such as, speculative buying, ‘unsuitable mortgage lending’ and unreasonable expectations over future house prices. Since 2006, US house prices have  fallen by 10%. UK House prices have increased even more (300% in past 10 years) than in the US , therefore, there is a similar scope for house price falls in the UK. Falling house prices would push the UK economy into recession as consumers see a decline in their wealth.

• However, I feel the UK housing market is less prone to a crash than in America. This is because house price rises are primarily due to shortage of supply, rather than speculation. Also in the UK, mortgage defaults are not as big a problem as in the US. I think it is more likely we will see a stagnating housing market in the UK. But, whatever happens to house prices it will definitely have a big impact on the economy.

Credit Crunch

The credit crunch is affecting finance markets in both countries; the main problem is that banks are finding it difficult to borrow and therefore the cost of borrowing is rising. The effect on consumers is to make borrowing more expensive and difficult. This is another factor which will reduce spending. The credit crunch is more serious because both the UK and US have high levels of consumer borrowing.

Stagflation

Despite a slow down in growth, UK and US are seeing a rise in cost push inflation. This is due to rising prices of energy, food and imports (from depreciating dollar and pound.) The MPC have a target for low inflation and because of the inflationary pressures they seem unwilling to cut rates. Maintaining rates at 5.25% will cause slower growth in consumer spending. If the MPC keep strictly to the target of inflation it makes a recession more likely.