UK Economy Heading for Recession 2009, All Gloom and Doom?

By: Nadeem_Walayat

What a difference a few weeks can make as if out of the blue the UK is headed for a deep dark recession as per headlines gripping the mainstream press of late. Whereas the fact of the matter is that none of this has appeared out of the blue, articles at the Market Oracle both penned by myself and others have laid the precise time-line for events long before the current doom and gloom headlines appeared.

Whilst late last year the mainstream institutions such as the OECD, IMF, and Treasury played safe producing forecasts for 2008 UK growth of 2% to 2.5% all pretty much inline with marginally below trend growth. Whilst at the time the Market Oracle forecast was for growth for 2008 of between 1% and 1.3%. Now some 7 months into the year, and a series of adjustments later the mainstream forecasters are starting to come around to our forecast for 2008.

Panic is in the air, as the UK housing bust appears to have come out of nowhere, again both the August 2007 peak and the rate of decent of 7.5% per annum were forecast here in the article of 22nd August 2007. Even the crashette of April 08 to June 08 was forecast here in November 2007, where the actual rate of fall for the quarter at 5.8% is even worse than the 5% forecast, which extrapolates into an annualised rate of decent of 23%. The housing bust is leading to reduction in consumer spending as much of the GDP growth over the last 4 years or so has been from mortgage equity withdrawals for consumption, that has now more or less gone as well as the impact of surging energy prices that act as a tax on the consumer.

The mainstream media in recognition of the deteriorating trend are all producing doom and gloom headlines suggesting a deep recession during 2009 as follows -

Blanchflower Sees U.K. Heading Into Recession, Guardian Says - The U.K. is headed for a recession that may last more than a year and result in hundreds of thousands of job losses, said Professor David Blanchflower of the Bank of England's interest-rate committee, the Guardian reported, citing an interview. http://www.bloomberg.com

UK heading into recession, Bank of England's Blanchflower warns - Professor David Blanchflower, one of the nine people who set UK interest rates, has warned that Britain is heading into a recession and called on his colleagues to act immediately. "I think we are going into recession and we are probably in one right now", he said in an interview published today. - http://www.telegraph.co.uk

Bank's Blanchflower sees recession - LONDON (Reuters) - The economy is heading into recession and interest rates should fall to "well below" their current 5 percent, Bank of England policy-maker David Blanchflower was quoted as saying in a newspaper interview. http://uk.reuters.com

etc.

What is clear from the above headlines that the mainstream media has a tendency to run with the same stories from the same source without much effort put into a real analysis of their own. An proper analysis would ensure more accurate and consistent news coverage that would enable the respective readerships to actually make decisions upon rather than the wild gyrations between euphoria and extreme pessimism.

Actual UK GDP Growth Forecasts for 2008 made during later 2007.

• Market Oracle 1% to 1.3% (Dec 07)
• CBI 2% (Dec 07)
• UK Treasury 2.15%, 2.5% for 2009 (Dec 07)
• European Commission 2.2% for 2008 and 2.5% for 2009 (Dec 07)
• Oxford Economics 2.3% (Dec 07)
• OECD 2% (Dec 07)
• International Monetary Fund 2.3% (Oct 07)
• Capital Economics 2% (Dec 07)

The Market Oracle UK GDP Growth Forecast 2009

Whilst it is a little early to produce a GDP growth forecast for 2009, as the last data released is only for the first quarter of 2008. However the trend is strongly in the direction of the Market Oracle forecast for growth for 2008 of between 1% and 1.3% and therefore can be taken as perhaps a little more reliable then current mainstream commentary? Now, what is undoubtedly certain is that 2009 will be weaker than 2008, and looks set to flirt with a recession, when I say flirt, I mean that the UK looks set to achieve one quarter of negative growth, whether the UK will suffer two consecutive quarters of negative growth is highly uncertain at this point in time. But that is very little consolation to the British electorate, as the current slowdown that extends to 1.3% of GDP growth already feels like a recession, thus 2009 will be extremely painful interms of subdued economic activity.

Therefore on that basis the trend extrapolated for the current and next 6 quarters into the end of 2009 is as per the GDP graph below. This suggests a 2nd quarter dip below zero followed by a bounce into year end to achieve a GDP growth rate of between 0.5% to 0.8% by 2009 year end. This is a far cry from what appear to be overly pessimistic headline grabbing stories doing the rounds in the mainstream press today, all running with the same press release from the same source and it appears that none of the stories have actually bothered to check up on past forecasts over the last 3 years made by the same source , as to the consistency of accuracy.

However this forecast is conditional on one important factor which is that a domestic wage price spiral is NOT ignited. Given that Gordon Brown IS Mr Bean in all but name going from one disaster to another, it remains a significant uncertainty and all BETS would be off if it were ignited. Therefore this is a preliminary forecast for the UK economy for 2009 in advance of more economic data over the next 5 months.

Recent Analysis of the UK Economy

• Brown Breaks Another Golden Rule, Real UK Debt Above 40% of GDP
• UK Flawed Inflation Measure Stoking Wage Price Spiral and Worker Discontent
• Inflation Surges to 3.8% as Bank of England Loses Control of Monetary Policy
• UK House Price Crash In Progress!
• UK Interest Rates On Hold as Bank of England is Paralysed by Fear of Inflation
• UK Retail Sales High Street Boom- The Truth Behind the Headlines
• UK Producer Price Inflation Soars Suggesting Stagflationary Recession

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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