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By Sarah Modlock
"There's an old joke which goes... "When your neighbour loses his job it is an economic slowdown. When you lose your job, it's a recession. But when an economist loses his job, it's a depression." It's funny how key phrases make all the difference. Some financial journalist friends recently told me they have a list of emotive, credit-crunch-related words which are banned by the newspapers they work for. We laughed about this initially but the more I think about the more it makes sense to try and keep a lid on sensationalism. Despite 'recession' being a technical term (usually defined as two successive quarters of shrinking output) our financial outlook can be dampened and perhaps damaged if it is talked up enough by the media. Business group the British Chambers of Commerce believes that although we are not in recession yet, it is inevitable. It predicts the economy will take until 2010 to recover. Ouch. With this in mind, I thought it might be helpful to look at five of the real indicators of a looming recession....how many have you spotted? 1. Falling house prices... You may have noticed how the classic dinner party chit-chat about the property market has fallen away as prices have started to slump. Although prices remain artificially high in London and much of the south east, most of the country has seen around six months of decline. According to Britain's biggest lender, the Halifax, UK house prices registered a 1.3% fall in September. The drop means the annual fall now stands at 12.4%, with the cost of the average home in the UK now at £172,108, close to the average price back in January 2006. Despite hopes that October's rate cut would spur lending and boost the housing market, banks have been slow to pass on previous rate cuts to new and existing borrowers, as they continue to scale back lending. The latest Bank of England figures show the average mortgage rate paid by new borrowers rose from 5.88% in August 2007 to 6.1% in August 2008 despite a three-quarters of a percentage drop in the Bank rate over that period. It's not surprising that people are finding it very difficult to move. Earlier this month, the Royal Institution of Chartered Surveyors reported that completed property sales in August were 47% lower than in the same month a year ago. 2. Shares plunging... Not a day goes by when we don't hear of yet another previously unthinkable nationalisation or stock market drop. Of course it's not just the British markets which are suffering but it all adds to the uncertainty. Even the government's big cash injection did not give the City a rosy glow. At a time when companies are unwilling or unable to lend to each other and shareholders are being ignored in favour of savers as failing companies are propped up, it's hardly surprising that the Stock Market is in the doldrums. Smaller savers, already losing out through the interest rate cut (you can bet it is passed on to savings accounts if not to mortgage borrowers), face losing out with stocks and shares ISAs. But even if you don't hold shares directly, your pension will take a hit as it will be funded through stock market investments unless you are close to retirement. 3. Unemployment rising... Many people do not remember unemployment being a problem. Unfortunately, that is likely to change. The number of people out of work in the UK rose by another 81,000 between May and July, to 1.72 million, according to government figures, taking the official unemployment rate up from 5.3% to 5.5%, the highest level since 1999. Meanwhile those on the dole rose by 32,500 to 904,900 in August, the Office for National Statistics (ONS) said. This is the biggest increase since 1992. In a further sign of the economic slowdown, the number of people in work and the number of vacancies both fell. The TUC warned that the number of people out of work for a year or more could almost double by the end of 2009. A trickle of job cuts and redundancies is becoming a steady flow as big businesses such as Lehman Brothers, XL Travel, Northern Rock and Ford have shed staff. In the three months to July 138,000 people were made redundant, up from 28,000 in the three months to April. Financial services fall out is expected to claim at least 10,000 jobs this year. 4. High street spending habits changing.. Some retailers report no change yet. Luxury jewellers for example are still selling £20,000 necklaces. But it's the middle and working class spending brackets that are likely to be hit harder. High Street maestro Sir Philip Green says 'business is very, very tough'. His BHS stores have just reported 34% fall in profits. Rival Marks & Spencer is also suffering. It reported its worst quarterly sales performance for more than three years this week. WH Smith says it made the same as it did last year. Meanwhile, trendy clothes chain Miss Sixty has folded and many other high street stores are issuing discount vouchers in an attempt to jump-start spending. The latest Nationwide Consumer Confidence Survey reveals that public confidence in the economy is at its lowest point for a decade. Only one in ten people believe now is a good time to make a major purchase. But a downturn in spending will result in retail closures and job losses. Traditionally, the Bank of England cuts interest rates a little in the last months of the year to give consumers more buying power and keep retail spending healthy in the run up to Christmas. This year could be very different as everyone cuts back and uses any drop in mortgage payments to save rather than spend. Department store John Lewis says that although sales of furniture are down, accessories for the home such as cushions and linen are selling well as people try to improve their surroundings in the absence of a move or complete redecoration. Sales of saucepans and coffee makers are also up as eating out declines. Some shops and retail businesses are thriving in the downturn though. Comfort eating is very much in style, confirmed by rising profits at Cadbury. Likewise, Domino's pizza is busier than ever. Trendy wine bars are out and cheaper venues such as Wetherspoons pubs are enjoying more business. Discount supermarkets including Aldi, Lidl and Netto are opening more and more branches to meet demand. Halfords says car maintenance is more popular as people holiday in the UK. Sales of camping equipment are also increasing. And Pontins holiday camps said last month that summer bookings were 10% ahead of last year as the credit squeeze combined with the strong euro have made people rethink foreign travel plans. Budget hotel chain Travelodge is also predicting 30% sales growth in its 30 coastal properties over the summer and has pledged to spend £150m opening 55 new hotels around Britain. 5. The pressure of inflation... Tricky thing inflation. Put simply, it is the rate of increase in the level of prices for goods and services, which affects the purchasing value of money. At the moment it's on the high side. The annual rate of UK inflation rose to 4.7% in August from 4.4% the month before, a higher-than-expected jump and a long way from the government's 2% target. The ONS said that this was due to higher gas and electricity bills. Bank of England governor Mervyn King has warned that inflation could reach a rate of 5% before falling back. If inflation hits a rate more than one percentage point above or below the government's 2% target, King must write a letter to the Chancellor to explain what action it is taking to control consumer prices. In his September letter, King blamed "sharp, largely unanticipated" increases in food and energy prices for pushing inflation well above the government's target. It's worth bearing mind that we are still a long way off the 1980s levels of inflation which reached more than 20% as oil prices rose. The Bank's October interest rate cut could help bring inflation down but King predicts inflation was likely to remain stubbornly above the government's target until "well into 2009". Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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