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 report was released as financial firms, housebuilders and retailers suffered falling share prices, and the FTSE 100 looked to be heading further into a bear market.
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 notyet 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.”