Are we heading for a recession?

YES! It's simple really, everything is messed up. I blame three things for the UK going into recession; firstly all the CEO's of the major banks; they decided when times were good to go into sub-prime lending and basically give huge mortgages to people, who were barely able to pay them back. As soon as the Bank of England raised interest rates in response to inflation, bang! Loads of people started to default on their mortgages! Of course we must not forget that a lot of these mortgages were given excellent reports (AAA ratings). This was not done by the banks but by a independent body! This means that when one bank say, for example Halifax bought a bunch of mortgages from Northern Rock, they were that this is a sound investment. Wrong! People started to default on these mortgages. This resulted in a major problem, banks no longer trusted each other. They stopped buying mortgage books, and lending money to each other, both of which are fundamental to the banking systems. Banks started getting into trouble due to the irresponsible way they lend. Northern Rock for example was unable to secure a loan off any other bank, so as a last resort had to go to the Bank of England for emergency funds. As soon as the stock market found out about this, their stocks plummeted. Due to the fact banks were unwilling to lend anymore money people found it extremely difficult to get a mortgage. This resulted in the Housing market slowing down due to a lack of demand, and unfortunately this affects consumer confidence, and therefore the whole economy started to slow down.

Number two! Our amazing Labour government (Sarcastic tone)!! Unfortunately for the citizens of the UK, the Labour government is not in a position to particularly help us in this time of crisis. Gordon Brown has claimed it was he, who gave the UK 10 years of economic prosperity. Well then it must also be him to blame for the mess we are in right now. You can trace the start of the UK's economic problem back to when Labour first took power in 1997. The first mistake was Gordon Brown's decision to sell a load of our gold reserves when the market was at it's lowest. We lost millions if not billions! Secondly it was the Labour government's decision to spend spend spend during an economic boom. Basic economic sense tells us that you save when the country is doing well, and spend when it is doing badly, to get it going again. So now we do not have the money to kick start our economy and stop it going into recession.

Number three! Rising fuel, and food prices. Despite lower demand and higher interest rates than a year ago we still have inflation at 4.3%(CPI). Why? Well it's all down to rapid economic growth in countries such as India and China, which is pushing up the price of raw materials, and food. Everyone was shocked when oil reached over $100 a barrel, well it recently hit over $150 a barrel. Don't be shocked it could still go higher! This is causing inflation as the price of everyday goods is pushed higher and higher. I mean think about it almost everything contains plastic, and what is plastic made from? Crude OIL! This high inflation is causing a real headache for the Bank of England's Monetary Policy Committee! This is because they have been set an inflation target by the Chancellor of the Exchequer of 2% + or - 1%. So in other words inflation cannot go above 3% or Mervyn King has to write to Alistair Darling explaining why inflation has gone so high. Well he better get his pen out! However the Bank of England must also consider the economy before it raises interest rates to combat inflation. Well as we know the economy is not performing well. In the second quarter of this year the economy did not grow at all, nor did it shrink, it stayed exactly the same. This is for the first time in 16 years. When the economy is performing like this a rate cut is really required like in the USA to stimulate demand. The BOE is, therefore stuck between helping the economy and stopping inflation.

There are still some positives surprisingly. Unemployment has remained low, and recently mortgage levels have returned to the level they were before the credit crunch. Therefore there is hope the housing market will start to recover, and this boost in consumer confidence, combined with low unemployment may stimulate demand, and thus the economy. The BOE also expects inflation to come down as oil returns to more like $100 a barrel. This means it will be able to cut interest rates to help the economy. Great we'll be ok? Afraid not, even if inflation comes down a bit the BOE cannot slash interest rates like in the USA. Yes it will become easier to get a mortgage but you still need 20% deposits at the moment, and on a £200,000 house that's still £40,000! Have you got that in your back pocket?

Hope you have enjoyed my view of where our economy is headed. I am sure some of you will disagree with my view as to why we are headed into recession. That's fine but the fact is a recession looks extremely likely!


By Paul Charnock (TPN's UK Economics)