Is Britain on the brink of recession?
The UK is hovering on the brink of recession as the credit crunch hits businesses across the country.
An ominous report from the British Chambers of Commerce (BCC) claims that British firms have suffering historically low levels of business. If this trend continues, it warns that a recession could be just three months away.
The report admits the outlook is “grim” after nearly 5,000 businesses reported high incidences of negative cashflows.
The BCC says that the risk of a recession is now so serious that the Bank of England should focus on strengthening the economy, rather than trying to tackle inflation.
The warning comes just days before the central bank’s Monetary Policy Committee (MPC) is due to vote on interest rates. Although expectations are largely that rates will be held at the 5% mark, there have been some concerns that they could be raised by 25 basis points in reaction to inflation hitting 3.3%.
However, David Kern, economic adviser to the BCC, says such a move could be disastrous.
“An increase in rates at the present time would weaken further the banking sector, and would endanger the smooth flow of finance to business. A major recession can still be avoided, but forceful measures are needed to improve confidence.
“The MPC must resist misguided calls for higher interest rates.”
The blue-chip index fell 129.20 points to 5383.50 during early Tuesday morning trading, more than 20% below its 6730.70 peak, the typical gauge of a bear market.
Ted Scott, manager of the F&C UK Growth & Income Fund, says that while we are now in a bear market for equities, the economy is not
yet in a recession.
“Despite months of gloomy headlines, house prices have so far only fallen a few percent from their peaks and unemployment is low, albeit rising.
“Therefore, if a recession does become a reality - and the risks lean that way - there could be further to go.”
One firm to suffer from falling share prices has been UK housebuilder Persimmon, which this morning confirmed it has made around 1,100 job cuts since the start of 2008, as a result of house sales being down by 31%.
The firm admitted that it is now in the "most challenging period in our recent history".
Restrictions in mortgage lending are largely to blame for the housebuilder’s woe.
The latest figures from the Council for Mortgage Lenders (CML) show the number of people being accepted for house purchase loans increased slightly between April and May. However, the number of new mortgages is down 44% from last year and remortgaging levels have also fallen.
The CML said that fixed-rate mortgages increased in popularity in May, accounting for 66% of all new loans, despite the rising cost of fixed-rate mortgages.
Although several lenders have recently reduced the costs of their fixed-rate loans, research from Moneyfacts shows the average three-year rate is now 7.25%, while the average two-year rate is 7.07%.
Darren Cook, mortgage expert at Moneyfacts, says: “Our two-, three- and five-year fixed-rate best buys are now entirely dominated by deals over 6%.
“This time last year, deals over 6% didn’t even make the best buys. There are still a handful of sub-6% deals, but these come with such high fees that any benefit from having the slightly lower rate is likely to be wiped out by the fee.”
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.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
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).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This refers to a market situation in which the prices of securities are falling and widespread pessimism causes the negative sentiment to be self-perpetuating. As investors anticipate losses in a bear market and selling continues, pessimism grows. A bear market should not be confused with a correction, which is a short-term trend of less than two months. A bear market is the opposite of a bull market.