Thursday, June 05, 2008
How Close is a Recession?
Having predicted Hillary will join the Obama ticket yesterday and read the general rubbishing of this idea in the press today, I'm cagey about making any more crystal ball jobs. But the Economist this week casts a gloomy light on the chances of a recession in the UK, prompted by the ongoing oil price hike. Its main article on the UK analyses the economic situation:
The good news
1. Between 2004-6 oil doubled in price but this led only to a small reining in of GDP and the economy absorbed it without too much trouble. Unlike during the seventies, our economy is no longer so oil-intensive and the increases were gradual not dramatic.
2. Britain is still an oil producer. Though the oil is drying up, the UK is still 'mostly self sufficient' and does not have to transfer huge amounts of resources to oil producing countries.
3. The labour market is much more flexible in 2008 than it was during the seventies when the oil hike 'instigated a damaging wage-price spiral'.
The bad news
1. The most recent oil price increase has not been as sudden as three decades ago but it has been damagingly swift: fronm April to late May the average price doubled on the 2007 figure.
2. During 2006-7 real disposable income increased by less than 1%, the lowest rate of growth since recessionary 1982.
3. Consumer spending have been sustained during the noughties by borrowing against rising house price equity. The credit crunch has now cut off that route to income replenishment and belts will have to be tightened for real.
4. Public spending is due to reduce markedly over the next couple of years, meaning a major device used by Brown to sustain the economy will no longer be available.
5. The Economist warns:
The most serious problem is that the inflationary backdrop to the current surge in oil prices is so much worse than it was earlier in this decade.
Inflation is now lapping at our doorsteps to the tune of 3% and polls show expectations that it will rise to 4.1% over the next twelve months. With figures like that the Bank of England is less likely to lower interest rates to stimulate growth than to increase them to squeeze out the inflation, thus bringing closer the spectre of something we have not experienced since the early nineties: a recession.
P.S. Meanwhile the FT offers a muchy more optimistic view...