Recession is here, say economists

Woman and plant

A leading economic forecasting group has warned that the UK is already in a recession, with the economy, household budgets and property prices set to shrink over the next 12 months.

The Ernst & Young ITEM Club autumn forecast also expects the economy to continue to contract until the very end of next year, with unemployment to rise as a result and investment to fall. It predicts the Gross Domestic Product (GDP) – the official measure of the economy's health – to shrink by 1% next year, making 2009 the first year of negative growth since 1992.

Although the recession will be “short and shallow” with the bottom expected in the last three months of 2009, the recovery in 2010 is not expected to be a quick one, with GDP likely to grow by just 1% during the year.

Peter Spencer, chief economist at the Ernst & Young ITEM Club, says despite government efforts to support British banks, the economy remains weak and is likely to have already crept into negative territory since the end of the summer.

“The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy,” he adds.

Despite the expectation of a recession over the next 12 months, Spencer points out that, assuming interest rates are cut and inflation continues to fall, the UK’s “fundamentally strong economy” should make it a relatively short and shallow downturn. However, stability in the banking system is vital if the UK is to avoid a longer period of economic woe.

Impact on households

The recession means households across the country are likely to find next year a tight one financially, especially as the availability of credit is expected to shrink further.

The Ernst & Young ITEM’s forecast indicates that disposable incomes will remain flat next year, with people cutting back their spending by around 1.2%. The number of households struggling with debt is expected to increase even though interest rates should be lower.

Spencer explains: “Last year consumers were able to handle the income squeeze by borrowing and dipping into their savings. This year it is a very different story with credit harder to access and far more expensive.”

Because the UK’s banks are now reliant on the government and the Bank of England, loans including mortgages are unlikely to get significantly cheaper anytime soon. And even if prices do fall slightly, tough criteria and a focus on “prudent” lending mean some people will still struggle to borrow credit.

A recession means unemployment will increase, as businesses cut back and some firms close their doors. Official figures recently revealed unemployment hit 1.79 million in August.

The ITEM Club says the amount in business investment is already subsiding and will fall back by 5% next year, prompting the job market to contract and the number of redundancies to climb.

It predicts the number of people claiming unemployment benefit will double from 2.5% at the end of last year to 5% by the end of 2010.

At the weekend, the Conservative Party called on the government to offer small and medium sized enterprises tax breaks to help them navigate the financial downturn. Shadow chancellor George Osborne suggests some firms should be allowed to defer their VAT bills for up to six months.

"[The government] was right to rescue the banks, because everyone depends on them, but now we need to rescue the real economy and stop jobs being lost and families suffering unnecessarily," Osborne added.

Housing market

The outlook for the housing market also remains bleak, especially in the face of the credit squeeze on banks and the general lack of consumer confidence.

ITEM expects that house prices will fall back 14% by the end of 2008 and a further 10% next year before stabilising in 2010.

The latest figures from mortgage lenders show £17.7 billion of mortgages were approved during September, down 10% from August and 42% from September last year.

The Council of Mortgage Lenders (CML), which compiled the figures, says £17.7 billion is the lowest gross lending figure since January 2005 and the lowest September figure since 2001.

Michael Coogan, director general of the CML, says: “Weakening consumer demand and ongoing funding constraints will dampen monthly lending figures for the rest of this year and into the first quarter of 2009.”

September is historically a strong month for the property market. Daniel Lee, spokesman for property search engine Globrix, says: "I don’t think it’s a case that the demand for property isn’t there - it’s more to do with sellers still stubbornly refusing to drop their prices and the unavailability of mortgage products making it extremely difficult for genuine buyers.

"We’ve also seen a noticeable decline in the number of new properties coming onto the market, which suggests that people who are not desperate to sell are waiting for the market to recover.”