UK heading into double dip recession

Britain faces a relapse into recession, official figures are expected to suggest this week, as the latest survey of household confidence also points to a property market poised to “lurch downwards”.

The Office for National Statistics is due to release data on growth for the third quarter on Tuesday – and it will show a sharp slowdown in the pace of recovery seen earlier in the year.

Some economists believe that Britain could suffer the much-feared “double dip” next year and, even if the economy doesn’t shrink again, any path back to economic normality seems certain to be protracted and painfully slow.

At the CBI Conference of business leaders today, the Prime Minister David Cameron, theDeputy Prime Minister Nick Clegg and the Business Secretary Vince Cable, will defend the Government’s austerity programme.

Mr Cameron will try to reassure the executives that the Coalition has a strategy to avoid a double dip. He is expected to say: “There is one question I want to answer today: where is the growth going to come from – where are the jobs going to come from?”

The ONS figure for the third-quarter growth will show that the economy expanded by just 0.4 per cent, compared with the bullish 1.2 per cent recorded over April to June, according to a Reuters poll of forecasters.

David Cameron

Most measures of consumer sentiment and economic activity slowed sharply after the emergency Budget on 22 June, as did the housing market. The lead-up to the cuts unveiled last week will have had a similarly depressing effect.

A two-thirds reduction in the pace of growth is likely to concentrate minds ahead of the Bank of England Monetary Policy Committee’s next move on 4 November, next Thursday. Many expect it to announce another round of “quantitative easing” – directly injecting money into the economy and keeping interest rates ultra-low. A further £50bn, on top of the £200bn so far administered, could be announced next week. The Governor, Mervyn King, has hinted that he is ready to follow this course. He is due to speak again today.

Whatever economic effect the cuts and job losses will have, simply the promise of the £81bn annual reduction in public spending, the harsh ministerial rhetoric and gloomy media coverage is already damaging household confidence, weakening investment intentions and depressing the economy.

Market research group Markit says in a poll today that sliding house prices and collapsing confidence have sent expectations for the property market back to the levels of last year. Markit reports a “sharp deterioration in household finances”.

Lower incomes and higher debt are “creating anxiety over future finances”, with spending falling at its fastest rate for nine months. Anxiety about unemployment is reinforcing the downward trends in the property market, they say, and housing market sentiment is “lurching downwards” as price expectations slump to a 17-month low. The prospect of savage cuts to public spending is reinforcing a weak housing market and an uncertain international outlook, a vicious, self-fulfilling deflationary cycle.

Such stagnation or minimal recovery will not generate sufficient jobs to compensate for the nearly one million that will be lost as the cuts bite deeper. It also suggests that the Government’s plans for deficit reduction may need to be revisited if the deficit grows wider as a result of the slowdown, with lower tax revenues and a higher bill for unemployment benefits bloating public borrowing. The Bank of England is increasingly being seen as the custodian of “Plan B”, in preference to the Chancellor, George Osborne, having to reverse some of the spending cuts or raising taxes even more.

Nonetheless, some economists believe that Mr Osborne will have to change course. The Institute for Fiscal Studies said this week that “significant risks remain” to the Treasury’s plans, and the Office for Budget Responsibility put the chances of success at no better than 60 per cent.

Howard Archer, the chief economist at Global Insight, said yesterday: “Our forecasts suggest that the Government will struggle to achieve its fiscal targets unless further corrective action is eventually taken.”

Nick Clegg

Mr Osborne was accused by Britain’s new Nobel Prize-winning economist of having “exaggerated” the risk of a Greek-style debt crisis. Professor Christopher Pissarides said that the prospect of a sovereign debt crisis hitting Britain – used by the Chancellor to justify his spending cuts – was “minimal”. He warned that Mr Osborne’s swingeing cuts package was taking “unnecessary risks” with the economy.

Today David Cameron is expected to emphasise two elements of the Government’s approach to creating what he says will be “a new economic dynamism”. One is the decision to invest £200m in technology and innovation centres that will help connect businesses to new technologies.

The other is to make the competition rules more “streamlined”, following the decision to merge the Office of Fair Trading and the Competition Commission. He is expected to say: “We want to reduce the uncertainty and the length of time it takes to make a decision in the current system. Above all, we want to help new companies break into existing markets. When we say we’re going to build a new economic dynamism – we
mean it.”

Ed Miliband will be making his first major address to an outside body since being elected leader of the Labour Party. He is expected to warn that government should intervene “to provide support to business”.

The CBI will also hear from the new Barclays chief executive Bob Diamond, who has earned nearly £100m from his time at the bank and could add more than £11m during the first year in his new position.