Opinions differ as to the length and severity of recession. Cabinet minister, Tessa Jowell, recently said that it was expected to be "deeper than any that we have known", but the answer to this question is, unequivocally, "Yes, it will." The technical definition of recession is a decline in economic activity as reflected by the GDP or "Gross Domestic Product" for at least two consecutive quarters. The British GDP contracted by 0.5% in the third quarter of 2008, following 0% growth in the previous quarter. Therefore, although Britain is not officially in recession until 2009, there is every indication that the country is already in recession. Key economic indicators, such as capital availability and expenditure commitments, suggest that recession will continue well into 2009.
What Does 2009 Hold?
As long ago as August 2008, the Chancellor of the Exchequer, Alistair Darling suggested that Britain was facing the worst economic downturn since World War II and was widely criticised for being overly pessimistic in his appraisal of the situation. Subsequent events that include an injection of £37 billion of taxpayers' money into the Royal Bank of Scotland, Lloyds TSB, and HBOS. Also, cumulative cuts in the Bank Rate from 4.5% to 2% in just two months and a 2.5% cut in the standard rate of VAT, seem to suggest that Mr. Darling may not have been too far from the mark in the first place. The Chancellor made his latest forecast, with regard to GDP, in his Pre-Budget Report in November, predicting a contraction of the British economy by between 0.75% and 1.25% in 2009. On this occasion, Mr. Darling's prediction was criticised as being overly optimistic by some MPs and economic experts.
The fact remains that unemployment in Britain is rising at its fastest rate since the recession of the early Nineties, with the number of people out of work in November 2008, up more than 75,000 on the previous month. The CBI ("Confederation of British Industry") predicts that unemployment will rise to 2 million by the end of 2009 and peak at around 3 million by the middle of 2010. Manufacturing output and orders have fallen sharply over the last three months, with the situation expected to worsen in the New Year, such that a further 100,000 manufacturing jobs may be lost by the end of 2009.
Furthermore, public borrowing is expected to rise to nearly 5% of GDP for 2008/2009 at close to £70 billion and to over 6% of GDP for 2009/2010 at nearly £94 billion. The Bank of England has already cut interest rates to their lowest level for 57 years, at 2%, and further cuts to 1%, or even 0%, are likely to take place at some point in the not-too-distant future. Consumer confidence is still at a low ebb, however, and consumer spending on larger, luxury items is particularly depressed. This situation is unlikely to improve throughout 2009, as the level of disposable income available to many consumers will be reduced.
Housing prices in Britain have taken a battering in 2008, with the price of an average home down 15% in November 2008, when compared with the same month the previous year, at just over £163,500. Low interest rates should mean affordable mortgage loans, but many lenders are yet to pass on cuts in interest rates, in full, to consumers, and are reluctant to lend money to anyone whose credit rating is not above average. Even so, the days of the 100% mortgage are long gone and prospective homeowners now need a large deposit in order to secure a mortgage loan. Housing affordability, measured as the ratio of house prices to earnings remains higher than the historical average of 4.0, at 4.56, however, but economic pressure may force the ratio below average, with house prices falling. Some estimates suggest that the slump in housing prices is only halfway through and prices may yet fall by a further 15% before they start to recover.
In summary, the booming economy that existed in Britain prior to the credit crunch was based on debt and as with debt of any kind; it is easier, much easier, to spend money than it is to pay it back. The most optimistic forecast for the end of the recession is the third quarter of 2009, although given the uncertainty and lack of confidence surrounding the economy, as a whole, it may well continue into the fourth quarter of 2009, or beyond.