Investors warned to prepare for recession
Investors have been warned to be prepared for a UK recession as the economy continues to slow and the Bank of England focuses its attention on beating rising inflation.
High food and energy prices, a subdued housing market and the ongoing credit crunch are “dampening” consumer spending, according to investment strategists at Legal & General, increasing the risks of a recession in the UK.
The minutes from May’s interest rate decision reveal that eight out of the nine Monetary Policy Committee members voted for a rate freeze, arguing that a slowing economy was necessary in order for inflation to return to its 2% target in around two years' time.
James Carrick, investment strategist at Legal & General Investment Management, says that with the Bank of England anticipating below-trend growth in 2008 and a recovery in 2009, the risk of recession is a real concern.
“The economy is borrowing more now than it was then and lending standards appear to have been tightened more aggressively,” he adds. “Investors should be prepared for a possible recession.
“[…] With global inflation so high, the burden of an economic slowdown is likely to be felt most severely in countries with the weakest financial positions. A decade ago that was Asia. Today it is the US and the UK.”
Meanwhile, the knock-on effects of spiralling oil prices are likely to continue to hurt the wallets of British consumers with those companies affected passing on the cost through higher high street prices.
Simon Denham, managing director of Capital Spreads, explains: “Haulage companies will be passing their increased costs to producers (who are struggling under their own energy bills), who will pass this on to the retailers who will attempt to pass it through to consumers.”
He adds: “Wages are currently not rising at the same rate as expenditure and it is likely that the average citizen will once again actually be poorer at the end of 2008 than at the beginning.”
Figures from the Office of National Statistics show consumer spending is down, with UK retail sales in April falling for the second month in a row.
However, April's fall was less than had been forecast, suggesting that any slowdown on the high street will not be as large or prolonged as originally feared.
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Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).