Recession is nearly over
The recession could soon be over in the UK, as a new report shows confidence among businesses has turned positive for the first time in two years.
Japan last week came out of recession, hot on the heels of the French and German economies, which both returned to growth in the second quarter.
And new data suggests the UK could be next. Confidence among business professionals has moved into positive territory for the first time in two years, providing further evidence of an improving UK economy.
According to the Institute of Chartered Accountants in England and Wales (ICAEW), there has been record rise in confidence from -28.2 to 4.8 - the highest jump since 2007.
The ICAEW now predicts that GDP - the official measure of economic health - will turn positive in the autumn.
Michael Izza, chief executive of the ICAEW, says the rise in confidence suggests the UK recession is at an end. He adds that policies such as quantitative easing (the creation of new money), the record-low Bank of England base rate and the temporary reduction in VAT have all helped improve confidence.
It is now hoped that revised GDP figures for the second quarter of 2009 - due to be released this Friday - could show the UK economy has performed better than expected. It is currently assumed that the economy contracted by 0.8% during the period.
But Izza warns: ““Although positive growth in the autumn seems more likely, there are concerns about the strength of the recovery. The recovery is very fragile and I would urge policy makers not to take any actions that could derail it.”
In his 2009 Budget, delivered in April, chancellor Alistair Darling said he expected the economy to contract by a total of 3.5% this year. He also predicted the UK would see the return of economic growth by the end of the year, and a rebound in 2010, with 1.25% growth.
Global markets have rocketed to 10-month highs on the back of raised hopes that UK economy will soon return to positive growth. The FTSE 100 has rallied 42% since hitting lows back in early March, with 2009 boasting the largest summer rally in equities for 25 years.
David Buik, economist at BCG Partners, says: “This has transpired as a result of improved sentiment, confidence returning from the deepest recession since 1929, economic data which is starting to bounce off the bottom of a vortex of despair and better-than-expected corporate results, which have manifested themselves as a result of stringent cost cutting exercises and redundancy plans."
Others agree there is now light at the end of the tunnel.
But such confidence comes with a word of warning. Dr Stephen Barber, head of research at indepedent online broker Selftrade, says: "Is it all over? The signs are good but I'm afraid it's still too early to say."
Asian markets, however, are getting in on the action, notching up triple digit gains following comments on Friday from the boss of the Federal Reserve that US is also moving ever closer to recovery.
Ben Bernanke, chairman of the Federal Reserve, told a conference in Wyoming that “economic activity appears to be levelling out” and that “the prospect for a return to growth in the near future appear good”
This was backed by the latest existing homes data from the US, which showed a 7.2% rise in July.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
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).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.