There has been a significant level of press commentary in recent weeks regarding the UK economy and whether it will fall into recession. Firstly, we need to look at what is a recession. The technical definition of a recession is two successive quarters of negative growth, ie the total amount of goods and services produced by the UK, which is known as Gross Domestic Product (GDP), would have to contract on a quarterly basis for six months.
However, while a technical recession requires two consecutive quarters of falling growth, individuals may feel that they are living in a recession despite the technical evidence if they are suffering from increasing living costs while there is pressure on income. Arguably, people may already feel that the UK is in recession owing to the sharp rise in living costs/inflation in 2008.
The UK could be considered as particularly vulnerable to a recession in the current economic conditions. The financial sector constitutes a large part of the UK economy, accounting for approximately a third of the increase in GDP in recent years, and with the current global credit crunch resulting in a sharp downturn in this sector, growth in the UK was always likely to be severely hit. Furthermore, there is the potential knock-on effect on house prices, which are already suffering falls, as well as a hit on Government tax revenues.
There also continues to be high levels of debt held by households, but with incomes being pressured and also the threat of increasing job losses as the UK economy slows, servicing this debt could get harder. Furthermore, while this debt level has historically helped boost consumer spending, thereby contributing to growth in the UK economy, falls in house prices and more difficult credit conditions will have a negative impact on spending, particularly on bigger items.
With sterling weakening in recent weeks, it may have been expected that manufacturing exports to other countries would have been boosted, which could in turn at least have partially rebalanced the economy.
However, owing to the sharp global economic slowdown, particularly in the UK's major export markets, it is now much harder to rely on exports to provide growth in the short-term.
The question of whether the UK is in danger of falling into recession was partially answered by official data released in August which stated that growth unexpectedly fell to zero from an original estimate of 0.2% in the second quarter of 2008. This was the weakest quarterly performance since the early 1990s when the UK last fell into recession.
There have also been unofficial estimates of growth since the second quarter from bodies such as the National Institute of Economic and Social Research (NIESR), who have calculated that the UK economy contracted by 0.2% between June and August. While the NIESR does not expect at this time the rate of decline to worsen in the short-term, it does expect a similar fall in GDP for the three months to the end of September.
In addition to the unofficial estimates, the Organisation for Economic Cooperation and Development has also stated that it expects the UK to be in recession by the end of 2008 while the European Commission has also predicted a similar fate for the economy. Finally, our own Bank of England has also said that it expects the UK economy to struggle to grow over the next twelve months with the governor, Mervyn King, stating that he "expected growth to be flat".
While it is still not certain that the UK will fall into recession, if this should happen there are a number of ways of counteracting such a situation.
However, as a number of the problems currently affecting the economy are international in nature, the UK may not be able to tackle a recession without the possible assistance of a concerted global action, particularly in the case of the global credit crunch. With inflation expected to peak around 5% later this year, the Bank of England also faces a difficult choice regarding cutting interest rates to help stimulate growth, although a slowing economy should eventually contribute towards reducing inflationary pressures. It is, therefore, likely that we will see interest cuts in the future, which should in turn help boost growth.
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