The UK now faces a 35% chance of a recession as the housing market continues to slow and consumer confidence continues to diminish.
A report by Lehman Brothers warns that the credit crunch in the US could cast a shadow over the economic health of the UK for the next two years. It also predicts an 8% fall in house prices during this time.
The investment bank says the chance of a "technical" recession lasting for six months is now 35%, while the probability of an outright recession lasting for more than a year is 20%.
Its report, Downward Spiral, states: "We now see house prices posting a cumulative decline of about 8% by the end of next year. Given the importance of housing wealth for consumer spending, this points to an economic slowdown that could last for some time."
The latest figures from Nationwide show house prices fell for the fifth consecutive month in March bringing the annual rate of growth to its lowest level since 1996.
The UK’s largest building society says the average house price is now £179,110 having fallen by 0.6% in March.
However, Nationwide says prices are still 11% higher than two years ago and 47% higher than five years ago - the equivalent of a price rise of more than £30 per day for the last five years.
The building society says a change in consumer sentiment since late summer 2007 has led to the downturn in house prices.
Figures released today show consumer confidence about making major purchases – such as a house – was down in March to its lowest level since April 1995. The research, commissioned by the European Commission, reveals consumer lack confidence in not only their own personal financial situation over the next year but also the general economic situation.
Rachael Joy, from GfK NOP, which carried out the research, said: “Consumer confidence continues its downward trend for the seventh month in a row. With news reports of possible recession in the US, fears of recession in the UK, and stockmarket fluctuations, the consumer’s gloom continues to grow.”
Lehman Brothers says the increasing risk of recession could force the Bank of England to slash interest rates to 4% in the coming months.
But Fionnuala Earley, chief economist at Nationwide, says that with inflation moving upwards away from its 2% target, the Bank of England’s Monetary Policy Committee (MPC), which sets rates, has a difficult decision to make.
She added: “On the one hand, inflation remains stubbornly high. On the other hand, the likelihood of a US recession is increasing and UK consumer confidence and credit conditions have weakened.
“Although retail sales are surprisingly strong now, it seems highly unlikely that this will continue. So, with consumers likely to spend less and a greater reluctance on the part of banks to lend in the current environment, at least some of this inflationary pressure will be dampened.”
The minutes from the MPC’s March interest rate vote show the majority of members felt that two consecutive interest rate cuts in a row could dampen consumer confidence further.
Earley said: “This barrier has now been removed and, since the last meeting, the collapse of Bear Stearns and the fallout from false rumours of problems in a major UK bank may have helped to shift the focus of the MPC to the need to loosen conditions in the financial markets.
“We think these latest developments, along with the continued weakening in the housing market, will mean that the MPC will bring forward its rate cut to April.”
How optimistic – or pessimistic – are you for the outlook of house prices in 2008? Vote now in our poll.