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How likely is a double dip recession in the UK?

While the slowdown in the US and elsewhere is a reason to be wary, there are still few signs the UK will fall back into recession.

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by Deborah Hyde on Sep 01, 2010 at 00:01

How likely is a double dip recession in the UK?

There are few reasons as yet to believe the UK will fall back into recession but the slowing pace of the recovery in the US and plans to slash government spending means uncertainty will dominate sentiment for many months – if not years – to come.

There has been some good news over the last week or so with second quarter economic growth revised higher to 1.2% from 1.1%, consumer confidence unexpectedly rising and better than hoped for retail sales in August, coupled with evidence that banks and building societies are lending more to both homebuyers and business borrowers.

The news has been so good that a number of commentators have actually upgraded their growth forecasts.

Howard Archer, economist at IHS Global Insight, raised his 2010 GDP forecast for 2010 to 1.7% from 1.5%.

And he is sticking to his view that the UK economy will grow 1.7% in 2011.

The British Chambers of Commerce (BCC) now expects growth to be 1.7% this year and 2.2% in 2011, up from 1.3% and 2% respectively in its previous forecast.

A Reuters survey of institutional investors shows many now believe fears of a double dip are overblown.

But for all the good news, sterling has fallen back to five week lows as the steady flow of downbeat economic news from across the Atlantic has seen many seek out the safe-haven attractions of the dollar.

And it is clear we will have to accept that growth will be slower going forward than it was ahead fot he credit crunch. BCC economist David Kern said the current government plans to slash spending means growth will be muted for years to come and the risk of a double-dip recession has increased.

Like many, Kern believes unemployment is set to rise again. Combined with higher taxes, this means the recent strength in consumer demand may soon run out of steam.

Newly appointed member of the Bank of England’s rate-setting committee Martin Weale told The Times that it would be ‘foolish’ to ignore the risks that could push the UK back into recession, defined as two consecutive quarters of negative growth.

Weale said a new financial crisis such as a government debt crisis or a lack of cash in the private sector, falling property prices and slowing consumer demand all pose a serious risk to the economy.

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5 comments so far. Why not have your say?

Very likely.

Austerity, retrenchment and prudence are on the rise in the developed world. In the UK, massive spending cuts are to be revealed shortly. Government departments face losing 40% of their budgets. Taxes will rise.

A double-dip recession in the UK and the USA is likely, whether spending is cut or not. The credit collapse is ongoing and the economy is already showing signs of renewed weakness, even before the State is laying off staff in any large numbers or cancelling orders.

Credit infused Britons and Americans are turning their backs on borrowing and spending and embracing debt repayment and saving. The social mood will further deteriorate, with massive layoffs and strikes looming. A period of discontent will test the government.

As for the stock market, with the next leg down beginning in April we may well breach the lows of 2000 and 2009 later in 2011. Then there may well be great opportunities to buy income producing shares at (deep?)'discount' prices. Till then, I'll keep my powder dry.

Steven Dotsch

Editor

www.early-retirement-investor.com

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It seems weird that news of US economic weakness should cause foreign exchange market participants to seek refuge in the safe haven of the dollar. Yet they seem even more inclined to retreat into the yen, in spite of the pervasive longer-term weakness of the Japanese economy. One doubts if this rather perverse psychology will persist indefinitely, but for the present it seems hard to find a major currency that actually has convincing positive characteristics to hang one's hat on.

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Deleveraging must cause a "double dip"!

http://www.accountingweb.co.uk/blogs/jefflcbba/mad-lemming/deleveraging-process-explanation

The scary thing is no one knows how deep the dip will be!

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Who's let the nutters out of the asylum? Double dips rarely occur and there is only a very remore chance of one happening now. Manipulators have been pushing up the bond market and shorting major equity indices in order to stoke a climate of fear and uncertainty endlessly fuelled by hysterical and poorly-reasoned commentary by the financial media. The bond market bubble will explode just like all other bubbles before. Why abandon Sterling and pile into the Dollar or Yen if you believe the US economy will again dip into recession? Makes little sense but then manipulation is never based on reasoned sense is it now?

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william morgan

Sep 06, 2010 at 08:57

Joe,

it is here. The DD started a month ago. We arent affected because we supply primary food industries around the world. But all of the local suppliers are in a downturn they have never experienced before. Some have been going over 30 years.

Stats lag reality by 3 or 4 months. Hope I'm wrong but the only local work I have heard discussed is public funded and not yet cut.

The joker in number 10 thinks that instant cuts are the answer. What a dope.

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