UK economic outlook

 

Throughout 2008, the economic climate in the UK has continued to deteriorate, a process that has accelerated since July with figures for GDP, confidence, insolvencies, lending and unemployment worsening each quarter.

The impact on UK markets is caused not only by the severity of the downturn but also the speed of change, which has been both rapid and dramatic. The same effects have also been experienced at an international level, which has created an unprecedented level of uncertainty across global markets with virtually every country now experiencing a recession or facing one as 2009 approaches. All key indicators suggest that any signs of recovery won’t materialise at least until 2010.

Banking failures hit confidence and growth

A key catalyst for the significant deterioration since September was the failure of Lehman Brothers bank and a number of other financial institutions, which sparked a wave of panic and prompted government led bail-outs in the UK, Europe and USA.

Vulnerabilities in other banking systems were also exposed following the collapse of the Icelandic banking sector, which fanned the flames of market unrest and caused a further decline in confidence.  A severe fall in the availability of credit followed, placing additional strain on business and credit markets with a corresponding reduction in economic activity and trade.

The reduced access to credit at both commercial and personal levels has caused a significant slowing of economic activity and a sharp drop in demand for goods and services. In the UK, consumption accounts for around two-thirds of GDP, so the combined effects of tighter credit conditions and increased costs of fuel, energy, food and mortgage repayments have reduced consumer spending with a considerable impact on GDP.

Growth reduced by 0.5% between Q3 and Q2 of 2008 and current forecasts for 2009 indicate a negative growth of -0.5%. This is a clear pointer to continued market reduction during the next 12 months, with the IMF predicting a contraction in real UK GDP of 1.3%.

Continued rise in unemployment and insolvency

Figures for unemployment and insolvencies already show a sharp rise for 2008, a trend which is expected to continue throughout 2009 fuelled by a combination of factors. 

The sharp drop in consumer confidence and spending, coupled with the downturn in UK and export markets, has already prompted businesses to address the situation with a number of measures, including job cuts. By mid November, unemployment in the UK had reached 1.82 million, up by 140,000 in the quarter to September, with a number of sources, including the CBI, expecting it to break the 2 million mark by the end of 2009.

A reduction in consumer spending, however, is only one of the issues facing businesses, as falling asset values, the inability to raise additional funds in the form of loans and credit and the increased pressure of servicing existing debts also exerts pressure on companies and directors. Insolvencies have increased sharply since the start of 2008, reaching 14,000 in annualised terms by the third quarter, although forecasts of negative growth and continued deterioration in domestic and export markets indicate that the trend is set to continue and likely to accelerate.

Figures look set to rise steeply to a high of around 6,000 firms by September 2009, representing a 53% increase over the same period in 2008, although the figure for the full year would be close to 45%, producing figures similar to those experienced in the 1990s recession.

Too early to assess effect of government intervention

Moves to reduce the severity and depth of the conditions facing consumers, business and financial sectors next year, have already been taken by the government. On 25^th November, Alistair Darling announced a 2.5% cut in VAT to 15% as part of a package of measures to stimulate the economy.  Also the Bank of England has slashed its base rate by 2.5 points to 2% in the hope of helping ease the debt burden, particularly for homeowners unable to re-finance and facing increased mortgage payments.

In both cases, it’s too early to gauge their effect on confidence and the economy as a whole, but the fact that these interventions have been made at least confirms that 2009 will be particularly challenging for UK business whether trading at home or overseas. 

For further detailed information, 

 please download our UK Outlook statistics