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News - 12 August 2010
Mervyn sends the Markets scrabbling

Double dip recession watch: Markets take fright over economic data

Fears that the UK could slip back into recession intensified yesterday as Markets took fright at the Bank of England's warnings on the UK economy accompanied by a range of depressing economic data.

Mervyn King - the Bank of England’s governor - cut the Bank’s growth forecast and warned that Britain faces a long and "choppy recovery". Businesses and consumers appear to be worried about looming public sector spending cuts and shaky economic prospects.

Official figures released at the start of the week showed a sharp rise in long-term unemployment and although there was afall in the number of people claiming jobless benefits it was smaller than expected.

The Bank's outlook intensified the debate over whether the economy is heading for a double-dip recession. The think tank, the National Institute of Economic and Social Research [NIESR] and has predicted that in UK output will remain well below its previous peak case until 2012.

The Bank cited the recent spending cuts as part of the reason why it is more cautious about UK growth prospects along with tight credit conditions and increasingly fragile consumer confidence. Its quarterly inflation report, which looks two years ahead, predicts growth of 3% then [previously it predicted 3.5%.]

The weakened outlook and the Bank's view that inflation will not fall back until 2012 left the financial markets scrambling to reassess the outlook for interest rates. The cost of borrowing for the government on a five-year bond fell to its lowest level in almost 20 years, as traders raised their bets that interest rates will remain at their record lows for many months to come.

Despite the fact that growth in GDP jumped to 1.1% in the second quarter as businesses enjoyed a rebound from harsh weather at the start of the year, many economists consider the Bank’s forecasts about growth to be too optimistic with a consensus suggesting it will be closer to 2% for each of the next two years. Even Mervyn King warned against reading too much into that second-quarter bounce.

Alan Clarke, economist at BNP Paribas, said: "I'm increasingly convinced growth will grind to a halt at the start of next year. We would be lucky if third-quarter growth is even half what it was in the second quarter, which was flattered by one-off factors"

King appeared particularly concerned about the latest business and consumer surveys, which he said had weakened "quite markedly". Last week, a key report on the services sector, which makes up the bulk of the economy, showed growth had dropped to a one-year low as companies complained about cancelled public sector contracts. Consumer confidence has also plunged back to recession levels according to Nationwide's monthly survey, while the prospect of hundreds of thousands of public sector job losses was blamed for falling house prices in a separate survey this week. A quarter of all homes in the UK are owned by public sector workers.

Read related items on:
Bank of England
King, Mervyn

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