In These New Times

Britain is close to recession, British Chambers of Commerce warns Telegraph
By Nick Allen
Last Updated: 10:15am BST 08/07/2008

Britain is on the brink of a recession and unemployment is set to rise 300,000 by the end of next year, according to the British Chambers of Commerce.

In a dire warning it said the economic outlook for the business sector was “grim and ominous” and the downturn could be “longer and nastier” than previously expected. The report followed a survey of 5,000 large and small businesses across the country and led to calls for an early cut in interest rates amid concerns that the economy is showing parallels with the start of the recession in the early 1990s.

However, the Bank of England’s Monetary Policy Committee is likely to ignore the pleas when it meets on Thursday as it battles inflation currently running above 3 per cent.

The pessimistic forecast came as one of the City’s leading banks warned that it could take 20 years for the British housing market to recover. In a note to clients Mark Hake, an analyst at Merrill Lynch said: “[Compared] with the 1990 correction… it looks significantly worse, with house prices falling faster and further and very little recovery in real terms expected over 20 years.”

He added: “House prices are expected to be below their August 2007 peak in a further 10 years’ time.”

The investment bank expects prices to fall 17 per cent this year. Inflation is likely to continue rising in coming months as the economy absorbs the effects of higher oil and food prices.

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BCC Director General David Frost said there had been a dramatic crisis of confidence among businesses over the last three weeks, many of whom had previously been upbeat about their prospects.

He said: “There is a real risk of recession in the coming months. This is deeply worrying and not just for business but for the consumer too, with both manufacturing and services reporting negative results. If these trends continue the UK business sector is now only one quarter away from technical recession.”

According to an analysis of Treasury figures, the struggling economy will leave Alistair Darling with a £7.5 billion deficit in his budget for next year. The Chancellor will be forced to make a difficult choice to close the black hole, as experts predict he will have to either raise tax, cut spending or borrow more and risk a further rise in interest rates.

The deficit is the equivalent of cutting 57,000 teaching jobs, stopping the MoD order for two giant aircraft carriers, and closing five hospitals. It is also the equivalent of adding 2p to the basic tax rate. The figures, compiled by the National Institute of Economic and Social Research (NIESR), will increase the fears of Labour MPs that they are heading for a general election with the public finances in chaos.

In a further signal that the economy is teetering on the brink official data showed manufacturing output fell 0.5 per cent between April and May when analysts had been expecting a much smaller decline. Paul Dales, UK economist at Capital Economics, said the figures showed the UK economy is “perilously close to recession”.

The BCC forecast an outright fall in UK output in at least one or two quarters and that growth over the second half of the year will be broadly zero. It said there were “remarkable parallels” with the beginning of the recession of the early 1990s and warned that the business sector could enter recession within three months.

Mr Frost said: “House builders putting up 100 or 200 units are simply walking off the site – that impacts on builders’ merchants and suppliers who saw orders fall off the end of a cliff. Undoubtedly there will be job losses.”

David Kern, economic advisor to the BCC, said unemployment would rise to nearly two million by the end of 2009. He said: “The results of this survey signal a menacing deterioration in UK prospects We are now facing serious risks of recession. London appears pretty weak and it’s across the board.

“Businesses are in a lose-lose situation. Falling demand and the squeeze on consumer disposable incomes will limit how far prices can be increased.”

The BCC said it believed pressures for rising wages were “muted” despite last month’s settlement involving striking fuel tanker drivers and called for an interest rate cut in November or earlier.

Mr Kern said: “A major recession can still be avoided but forceful measures are needed to improve confidence. The Monetary Policy Committee must resist misguided calls for higher interest rates.”

George Buckley, chief UK economist at Deutsche Bank, said current rates of growth were similar to the early 1990s. He said: “You’re flirting with recession and it’s a very serious risk.”

The BCC said the government’s reversal over the abolition of the 10p tax band had left it in a tight fiscal position and the temptation for Gordon Brown and Alistair Darling would be to raise money from businesses.

Mr Frost said: “To put more pressure on business would not only restrict growth and hit the consumer hard, it would further crush what our economy is based on – confidence. It would be disastrous for the economy.”

The decline in manufacturing output in May was attributed to the ballooning costs for oil, as well as higher metals and food prices.

Howard Archer, chief UK economist at Global Insight, said: “Sharply contracting industrial production heightens concern that the economic downturn is deepening.

“But an interest rate cut this Thursday still remains a remote possibility, given the Bank of England’s concern over current elevated inflation levels and risks.”

Gloomy economic data has piled up since the committee last met, with the Chartered Institute of Purchasing and Supply last week saying the UK’s service sector shrank at its quickest rate for nearly seven years during June. Consumer confidence has fallen to its lowest level for 18 years and manufacturing activity has slumped to its lowest level since the aftermath of the September 11 terrorist attacks.

According to Nationwide house prices fell for the eighth month in a row during June to stand 6.3 per cent below their level 12 months ago. That was the fastest rate of decline since the 1990s house price crash and construction activity slowed at its fastest rate for at least 11 years. Philip Shaw, of Investec Securities, said: “Our judgment is that the economy is now close to the buffers and that a recession is close to a 50/50 call.”