Royal Dutch Shell Group .com Rotating Header Image

The debate is over: recession is already here logo

The debate is over: recession is already here

Thousands of jobs are being lost and house prices are falling at a record rate

We’re going into recession. That’s all you need to know.

Actually, not quite all you need to know. It may be worse than that – we may already be in one. The turn in the economy, although it has been lurking out there for some time, has come swiftly and sharply in the past few weeks, as is often the case with recessions. When the economic history books are written, they will almost certainly say the late-noughties recession began in earnest in the late spring of 2008.

Last week, the housebuilding industry threw in the towel and walked off the job. Thousands, probably tens of thousands, of jobs have already gone and building sites have nothing but a “private property – keep out” sign hanging on a rusty fence.

And on Friday we had the latest reminder of how bad things are getting on the other side of the Atlantic as Freddie Mac and Fannie Mae looked in danger of collapse as a result of the housing market slump.

Here, City banks have been shedding jobs by the thousand in the past year. They are also not doing any mortgage lending to speak of.

House prices are falling at their fastest pace ever recorded, the Halifax revealed on Friday. My prediction earlier this year that house prices would fall 25% in this downturn is likely to prove optimistic. Prices are already down 9% from the peak last August (13% in real terms if you allow for the 4% rise in the retail price index over the past year). And it is difficult to see where the slide is going to stop given that mortgage companies have pretty much given up lending and prospective buyers, even if they have the finance, have decided they would be mad to buy in this market. Given that prices had trebled over the decade to last year, a correction of one third cannot be ruled out.

Think of all the architects, builders, estate agents, structural engineers, solicitors and so on who depend on a busy housing market. The commercial property market is in meltdown too, with prices down a quarter and many office and warehouse projects standing idle.

The construction industry, which as a whole employs about 2 million people and accounts for 9% of gross domestic product, reckons it is in rude health outside the residential and commercial property sectors. Helped by the Olympics and public-sector infrastructure projects, they say, things are OK. But even that is too optimistic an outlook. The government, desperately short of money, is not writing much new business for construction companies, so growth will slow there too.

Sharply negative

In fact, this month’s purchasing managers’ index for the construction sector, which gives a good snapshot of the state of play, was simply awful, as were those for services and manufacturing. All turned sharply negative at the same time. The red light of recession began to flash. Manufacturing, we thought, was doing well off the back of a still-strong world economy. Now the data is showing that sector has ceased to grow, as the weakening domestic economy takes its toll.

The public sector – a big driver of growth in the economy for the past several years under Labour – is shedding jobs too as the government tries to rein in public spending. In fact, the public finances are also flashing red. Recessions are the enemy of public finances – they reduce tax receipts and push up spending on benefits. Forget the idea of a tax cut to boost growth – the pot is empty.

You can search all round the data – and we have – for signs of strength in this economy and there are virtually none. True, the retail sales data for May was strong on the back of that 10-day spell of hot weather. But the number was suspiciously strong and may well be revised lower. June’s number is likely to show a fall.

Let’s look at some other figures. Unemployment has been increasing for the past three months even before all the people laid off in recent weeks sign on and swell the numbers further. Figures out this Wednesday are likely to show a further climb from the current 1.65 million unemployed. Unemployment is traditionally a lagging indicator in that it usually is the last figure to signal an upturn or downturn. So it is significant that it has already turned up.

It is not surprising that wage growth is so subdued and has not picked up in response to rising oil and food prices. Firms are also hit by rising costs and so have an incentive to hold down pay rises. Employees, knowing the economy is in trouble and that unemployment is rising, realise pushing for a big rise may put them out of a job.

Economic growth halved in the first quarter of this year, from 0.6% in the fourth quarter of 2007 to 0.3%. Given the meltdown of the past three months, the first estimate of second-quarter growth, out later this month, is likely to show a much lower number, possibly even a negative one.

The third and fourth quarters are almost certain to show a decline, meeting the technical definition of a recession, although we will be lucky to escape with only two or three quarters of decline. That would constitute what economists call a “soft landing”.

Given how bumpy and turbulent things feel now as we approach the runway, a hard landing feels much more likely, although hopefully a crash can still be ruled out. In the early 1990s recession there were six quarters of contraction. We could well be in for that this time.

Darren Winder, an economist at Cazenove, is gloomy. He thinks next year could see the economy contract by 1%. After growing at 3% or more for years, that is a big change.

Gathering pace

The Cazenove “shadow” monetary policy committee has voted to cut interest rates for the past three months, while the real MPC at the Bank of England has left them steady at 5%.

Inflation, of course, is the MPC’s problem. It has risen to 3.3% on the consumer price index measure, a 15-year high and well above the MPC’s 2% target. June’s figure is due tomorrow and is expected to rise to 3.6%.

The MPC, led by the Bank’s governor, Mervyn King, has the following dilemma – will the slowing economy drag domestic inflation down by more than international inflation, in the form of oil and food prices, is pushing it up?

Winder thinks it will. When the MPC members meet next month to write the quarterly inflation report, they are almost certain to revise down their forecasts for economic growth for the coming years by more than they revise their forecast for inflation upwards. And that would imply they may start to cut interest rates sooner than many in the City are assuming.

The downturn in the economy is gathering pace so rapidly, in fact, that a rate cut next month, while unlikely, is far more likely than the rate rise some in the City still expect, although quite what planet they are on escapes me. Not planet Recession like the rest of us, that’s for sure.

This website and sisters,,,, and, are owned by John Donovan. There is also a Wikipedia segment.

Comments are closed.