The recession should dispel inflation
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In an announcement that will shock none but dismay many, the UK economy has ‘deteriorated dramatically’ in the past three months, and is already in a recession, according to the latest forecasts
The figures suggest that the UK will shrink by 1% over the next year, before recovering in 2010 and growing by 1%.
There is a plus side to this as inflation is now likely to fall, which should allow the monetary policy committee of the Bank of England to cut interest rates further.
Top economists combine these two factors and claim that with plunging interest rates, falling inflation, and a fundamentally strong economy, the recession will be ‘relatively short and shallow’.
The latest claims are not alone in thinking the UK has entered a recession, which is technically defined as two quarters of negative growth. A recent quarterly survey of 5,000 businesses by the British Chambers of Commerce also said the UK was in a recession.
As a result of the slowdown, widespread cuts in investment and employment are inevitable. While the largest job cuts so far have been in finance and housing, the sectors most closely linked to the recent turmoil, it is believed the effects will spread further.
Unemployment claims could hit 5% by the end of 2009, which is double the rate at the end of 2007.
The new report comes after recent data from the Office for National Statistics underlined the weakening labour market. The number of people out of work in the
UK rose sharply in the three months to August by 164,000 compared with the previous quarter, marking the biggest rise for 17 years.
Until September, accelerating inflation had been a major concern; latest figures show the annual CPI rate reached a 16-year high of 5.2% last month.
But prices have fallen recently, most notably for energy, and analysts expect September’s figure to mark a peak. However, real disposable incomes are set to remain flat in 2009, before rising in 2010.
The predictions continue that house prices will fall 14% by the end of this year, and drop a further 10% next year. Until the bottom of the market is reached and confidence returns the housing sector will be in suspended animation.
Last year consumers were able to handle the income squeeze by borrowing and dipping into their savings, but this year it is a very different story with credit harder to access and far more expensive.
There is essentially nothing new in these predictions, they follow the same pattern we have been hearing about for several months now and the banking crisis did not exactly bring any hope. What is new is that this report is based on more accurate figures and predicts over a shorter time frame.
This would suggest that we have moved beyond predictions and into descriptions of what will happen. Of course no description of the future will ever be 100% accurate, but this is going to be pretty close.
