Saturday, 28 June 2008

UK edges towards recession

The UK is slipping towards outright recession. The first quarter GDP numbers had the UK growing at just 0.3 percent, which is a little over one percent at an annualized rate. Growth is down sharply and and if the deceleration continues, the economy will probably begin to shrink during the second half of this year.

Declining investment expenditure is the major reason behind the slowdown. The chart below breaks down the 0.3 percent q1 growth rate into its component parts; consumption, investment, government expenditure and net exports. The components made positive contributions to growth; consumption, government expenditure and net exports. However, declining investment knocked off 1.2 percentage points off GDP growth.

The investment decline was largely due to a firms reducing their inventories. Companies are bracing themselves for a slowdown and they are busy selling off unwanted stocks. It is a dangerous thing to go into a recession with a warehouse full of unwanted stock.

So far, the household sector has kept spending. However, the combined effects of higher prices and negative real wage wage growth forced consumers to reduce their savings, and where possible to build up credit card balances.

Deferring savings and accumulating debt can only delay the inevitable slowdown in consumption. Once the household sector capitulates and reduces consumption, the UK will slide into negative growth. The second quarter is going to be tough.

5 comments:

Anonymous said...

Just wait 'til unmemployment starts to gear up. The property market will be toast.

Anonymous said...

Does the ONS use a CPI deflator to get GDP or any of the other fraudulent tweaks like the US does? If so, I'll bet we are already in a recession even on the lagging official scorecard.

Nick

Anonymous said...

It uses a GDP deflator which should be an index that corresponds to the value of UK GDP. This index will be different to the CPI.

sobers said...

I find the continued ability/desire of the UK consumer to spend money amazing. The recent Retail Sales figures were shocking to me. I can't understand it. Can such mad spending be maintained? Is it possible to spend your way out of a recession, when you are collectively up to your ears in debt already? Surely at some point the money has to be repaid, and the whole house of cards will come crashing down?

aSteve said...

Nick/anonymous/Alice?

Can we find out any concrete information about this GDP deflator? It seems extremely relevant - and, to be honest, I've absolutely no idea how it is calculated. I imagine it would be instructive to establish such details.