The latest revelations and fines for Barclays on their alleged manipulation of interest rates and potential selling of protection against interest rate rises, could lead to another banking crisis. Some commentators have stated this could be the “tip of the iceberg” with possibly all the major UK and some overseas banks being involved in similar schemes.
The RBS and Nat West “meltdown” of their banking update systems has now focused their shortfalls away from their business customers to the many consumers who have been put in cash flow problems for over a week in some cases.
With the European national debts regularly in the news and the banks lurching from one crisis to another, what chance has business and the wider UK economy of getting out of the double dip recession?
It appears that the UK economy is going around in circles. Remember Woolworths demise and now we have Clintons/Birthdays. There was a private sector led recession in 2009 and now a public sector led one in 2012 – the predicted double dip. Banks with problems still abound, low growth and record low interest rates for 3 years. It’s the roundabout that keeps on turning…………and no upward swing in sight.
The Eurozone crisis continues to ebb and flow as each deficit troubled country provides no clear signal of how it will recover, and this has been a factor in the stagnation of the UK economy.
To quote from the film Shakespeare in Love, “So what do we do? Nothing. Strangely enough, it all turns out well. How? I don’t know. It’s a mystery”. The real question however is when will it turn out well.…………?
The UK appears to be showing the signs of a possible second recessionary phase with a retail malaise and consumer confidence shaky at best. Consistently high fuel price rises, increases in utility costs around the corner and food inflation forcing households to review their weekly spend. Interest rates’ remaining static has become the “norm” over the last year or so but this will not continue. Is the “double dip” going to become a reality?
The prognosis on growth has been reduced by both the Government and the IMF and with companies regularly going into administration, and continued cut-backs by businesses, it would appear that the Japanese stagflation model may be mirrored in the UK over the next few years.
It is not all doom and gloom with a number of businesses becoming more focused and streamlined with even some growth opportunities being exploited. Many businesses who have survived through the prolonged downturn are now looking ahead to the future.
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The Organisation for Economic Co-operation and Development, (OECD), warned that the UK austerity measures pose “headwinds” to growth, and has significantly cut its forecast for the UK in 2011, to only 1.7%, down from 2.5%. They also stated that the housing market is at risk of a double-dip downturn that poses significant risks to recovery, on the back of comments that net mortgage lending for 2010 would be the lowest since 1980, amid stagnant property demand.
This weeks bail out for the Irish economy is possibly the first in a number required to protect the Eurozone from further sovereign debt defaults, with Spain, Portugal, Turkey and Greece remaining in serious economic strife.
In the UK a total of 1.6m jobs will be lost across the economy as a result of the Government’s deficit reduction programme, according to the Chartered Institute of Personal and Development (CIPD). It estimates spending cuts will account for 725,000 of those losses, the hike in VAT to 20% a further 250,000, and knock-on redundancies in the private sector of 625,000. When these are added to the current unemployment figures the total will likely be higher than in the recession of the 1990’s.
This week leaders of some of Britain’s biggest businesses gave an emphatic endorsement of the coalition Government’s decision to cut spending immediately in order to pay down the UK deficit.
That of course is the private sector view, however the suggested 25% cuts in the public sector have not engendered the same reaction from those employed in this area or their unions, with a figure mooted of around 600k jobs to be lost in the next few years. The Government expects new jobs to be created in the private sector to cover most of these losses, but there are two factors that show this may not happen and thus push the UK into perhaps a “double dip” recession. Firstly, the public sector relies on supplies from the private sector and so there are bound to be ancillary job losses there. Secondly, many companies have already saved job losses by putting in pay freezes and short-time / part-time working. Any recovery will only mean putting the effected employees back to work full-time and thus not produce additional employment.
There are difficult times ahead but now that the budget has at least provided the benchmark on what to expect – businesses now can plan with some certainty their future recovery strategy.
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With no clear majority after the UK election, in essence a “hung parliament”, the country awaits the outcome of discussions between the main political parties on how a coalition government could optimise a strategy that would some positive impact on the economy.
The Bank of England also has held the UK base rate at 0.5% in May and decided not to pump any more money into the economy through quantitative easing. The British Chambers of Commerce and Institute of Directors both agree that with the fragile situation rates should not be raised. Inflation is over 3% for April and the last quarter’s initial growth estimates at 0.2%, half the final quarter of 2009 indicating another potential slow down in the economy.
All this pales into insignificance with the events surrounding the Greek debt crisis, and to a lesser extent the problems in Spain and Portugal, as the global markets declined rapidly last week when it appeared that Greece “had finally gone bust”. The reaction on Monday to a European Central Bank initiative for a three year stability package to support the Euro, thus stemming the decline of Eurozone countries, provided an initial 5% increase in share prices. The “see saw” antics of stock markets caused by over eager market makers shows that as a global institution, we are being influenced by a lot of uncertainty of what the future holds and when, or if, stability will return in due course.
Whatever the situation in the UK, now and in future months, it is the global macroeconomic movements that are going to influence a recovery or “double dip” recession in individual national economies, but the consumer and business will have to deal with fallout for some years to come.
The Bank of England kept interest rates at a record low of 0.5% for the 12th consecutive month on Thursday, a decision widely expected as any rise in the cost of borrowing could damage the UK’s fragile economic recovery. The bank has not pumped any more money into the economy under its quantitative easing (QE) but may have to restart its asset-buying programme, (QE), if the economic outlook deteriorates, but many analysts are predicting monetary tightening later this year. It appears that the “tensions that underlay the build-up of large world imbalances have not been resolved” and the UK’s largest export market, the euro zone economy, has stalled.
Despite the upward revision to GDP in the fourth quarter of last year, to 0.3% from an estimate of 0.1%, the economy remains weak. Businesses are still under serious pressure and the threat of a double-dip recession is more serious in the near future than risks of higher inflation.
The pound took a pounding last week and suffered its biggest one-day fall for more than a year amid the prospect of a hung Parliament, after the election mooted to be in early May this year. There are fears that this will prevent swift and decisive action being taken over Britain’s public finances. Sterling fell to under $1.50 for the first time in ten months and today closed at $1.51. Against the Euro it is only €1.11 and has remained at this level for some time, despite debt issues in Greece and Portugal putting pressure on the Euro.