Recession & The UK Economy

25 April 2008


Reader Writes:
Do you believe we are going into a recession and what might this mean for us?

First of all let me define ‘recession’. In real terms it means a downturn but for the purposes of an economy, it is defined as two quarters of negative growth.

A recession can be short-lived or can be more dramatic and depressive. Up to now we have lived in a booming environment with lots of cash to borrow at low rates with no negative issues in terms of repayment.

The public were fed this new ‘learned truth’ of wealth and they believed it. The worry is that many will not have prepared for a downturn and the effects could be dramatic.

Do I believe we are heading for recession? Yes I do, and I believe central banks have been too slow to avoid it. One of the leading financial fund managers in the UK, Philip Gibbs commented back in 2007 that rates need to fall and fall soon. He commented that if they did they could avert a serious downturn, and that as time went by the central banks were guilty of doing too little too late.

He also commented there was a serious problem, and if they were not aggressive with rates it could be a ‘potential bloodbath’. Central banks are seeing it slightly differently and with their pipes, slippers and rocking chairs, they ease closer to recession, blinded by their concerns of inflation.

Whilst inflation is an issue, it could soon not become one, as the high street crumbles. I was always told to watch who is in the pubs. ‘In difficult times or good, people always drink beer’, my analyst friend used to say. It is very notable there is less beer being drunk, as many pubs resemble a ghost town and that’s on a normal busy night.

So what are the signs: Six months ago the papers were signalling house prices were still growing. We told you they were falling. All the noise was positive but we told you that completions were plummeting. This is the real information behind the noise.

Now the noise is about desperation in house prices and everything we said two years ago is being printed – a real sign that sentiment and momentum is nose-diving. Other signs of recession are clear: sterling has fallen to record lows against the Euro, a real indicator that traders believe the UK is an unattractive place to invest. Only one in ten people believe that now is a good time to make a major purchase, a sign of economic gloom. Rising oil prices is driving up the cost of living and taking more money out of people’s pockets meaning they spend less, and so the circulation of money slows. It also keeps the pressure on interest rates to remain higher.

Only seconds after announcing his budget forecasts, Mr Darling is having to revise his growth forecasts. If he has it wrong, he will need more money. Where will that come from? Either way it won’t be positive for the high street.

Continued sub prime losses have meant that borrowing has tightened beyond belief. Money supply is tough, so long gone are the days of tapping into the house like an ATM.

Lastly the city has already begun announcing job cuts, a sure fire sign of a downturn. With less money being earned, less will be spent. Less being spent, equals less to go round, equals more job losses, which is a downward twister.

Companies concerned about spending, tighten their belts, stop advertising, and rely on protecting what they have got.

Central banks may well rue the comfort of their slippers when they look back, but the next few months will be critical. My view is they will loosen their grip on inflation by relaxing rates again next month even though all the noise they are giving is that they won't. Hold on tight for a rough ride.

If you have a financial query call Peter on 0800 0112825 or e-mail info@wwfp.net


Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.