UK economy grinds to a halt
After 16 years, longest period of growth ends
By Sean O'Grady, Economics Editor
Saturday, 23 August 2008
The boom is officially over. Growth in the economy ground to a halt in
the second quarter of this year, thus ending the longest period of
expansion in British economic history. The bust may not be far behind:
many economists now believe an outright recession – two successive
quarters where the economy shrinks in size – will follow later this
year, a period of contraction that could extend well into 2009.
A generation too young to remember the last severe downturn will soon
have to face such unfamiliar phenomena as rising unemployment, negative
equity, home repossessions, large-scale bankruptcies and stagflation, as
inflation continues to climb even as the economy stagnates.
At 5 per cent per annum, as measured by the RPI, inflation was last this
high in July 1991, on its way down, while growth was last lower in the
second quarter of 1992, when Britain was climbing out of the last
recession. The "difficult and painful" year that the Governor of the
Bank of England, Mervyn King, predicted last week seems to have arrived.
The Office for National Statistics yesterday revised its estimates for
growth for the second quarter of this year downwards, from an increase
of 0.2 per cent to zero, thus ending the run of 63 successive quarters
of expansion.
Technically, the statistics revealed that the UK economy actually did
grow between April and June, with the total value of goods and services
produced in the UK rising from £315.510bn to £315.629bn, a rise of
£119m, or 0.04 per cent – a minuscule increase by recent standards.
Household spending fell by 0.1 per cent, but construction, financial
services and investment generally is being hard hit, with only a
relatively strong performance from exports and a fall in imports
preventing a slip into negative growth. Removing the trade figures puts
the purely domestic economy in decline for the past two quarters and
thus in recession, as one member of the Bank of England's Monetary
Policy Committee, David Blanchflower, has already declared. All the
indications are that things will get worse before they get better, and
on a historic scale. Consumer confidence is running at levels not seen
since 1974, with sentiment in the housing market registering 30-year
lows; forward business orders are also hitting near-record poor
performances.
There are signs the credit crunch is easing but first-time buyers are
still finding it almost impossible to find a mortgage – and fewer want
one as house prices fall by 10 per cent a year. Meanwhile, gas price
rises are set to push inflation above 5 per cent, slowing the economy
further.
There is a belief in the City that recession will force the Bank to cut
rates by the end of the year. It has predicted "broadly flat" growth
this year, and conceded a likelihood of two or more quarters of negative
growth. Yesterday, the pound fell on expectations that rates would be
cut sooner. Sterling hit its lowest level for a week against the euro.
However former Conservative chancellor Kenneth Clarke said he did not
think the Bank would cut interest rates. "My feeling is that they will
have to be raised because inflation is going to be a problem. The Bank
cannot do anything about oil prices and it cannot do anything about
global food prices," he said. "But it's got to make sure we don't get
into a wage-price cycle bringing back really high inflation and making
any slowdown worse than it otherwise would be."
Mr Clarke said a Tory government might inherit a "real mess" and will
face "tough choices".
Vicky Redwood, UK economist at Capital Economics, said: "There must be a
strong chance, now that output is falling, that the UK has already
entered a technical recession."
Figures this week suggested the slowdown had resulted in a £2.2bn
shortfall in stamp duty revenues already this year, and government
spending rising faster than ministers assumed.
The Institute for Fiscal Studies estimates that a 1 per cent drop in
growth adds about £2.5bn to public borrowing. Given that the Budget in
March was based on a projection for growth this fiscal year of 2.5 per
cent, Alistair Darling will face a black hole of at least £12.5bn in the
public finances.
Crowing about growth
9 March 1999
Gordon Brown: "I can confirm our growth estimate for 1999 of 1 per cent
to 1.5 per cent, which is what I told the House in November, followed by
stronger growth."
21 March 2000
GB: "Today, I can report that in 1999, instead of the recession that
many forecast, the British economy grew by 2 per cent. And Britain has
been growing steadily while meeting our inflation target."
16 March 2005
GB: "Britain is today experiencing the longest period of sustained
economic growth since records began in the year 1701."
21 March 2007
GB: "I can report... that after 10 years of sustained growth, Britain's
growth will continue into its 59th quarter – the forecast end of the
cycle –and beyond."
12 March 2008
Alistair Darling: "While other countries have suffered recessions, the
British economy has now been growing continuously for over a decade –
the longest period of sustained growth in our history."
http://www.independ
halt-906524.
Saturday, 23 August 2008
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