Prospects of Recession in the UK

Mervyn King, governor of the Bank of England has said that the UK faces the prospect of a recession, with output falling for at least 1 or 2 quarters. However, on balance he still feels the most likely situation is for the UK to avoid recession; but, growth will remain sluggish in 2009 and 2010.

Factors That Could Push the UK into Recession

Low Wage Growth.

Average real wage growth in the UK has averaged 1%. With rising cost of living, people’s discretionary income is barely increasing.

Rising Unemployment.

Yesterday saw the first sign of a change in the unemployment pattern with a rise in registered unemployment.

Falling House Prices

UK House prices have started to fall and this has a powerful negative impact on the economy - see: effects of falling house prices

Rising Cost of Living

Rising food prices and rising energy prices reduce discretionary income leading to falling demand. (for A Level students note that the AS curve shifts to the left causing a movement along AD curve).

Difficult to Cut Interest Rates

Also these cost push factors are causing inflation to increase above the governments target. This means that the MPC are finding it difficult to justify a cut in interest rates. Therefore, although the economy is slowing down, interest rates may remain high.

Credit Crisis.

Shortage of credit is causing interbank interest rates to increase. It is also making it more difficult to secure loans leading to lower investment and consumer spending

Global Slowdown

The US and the EU are at risk of a slowdown. These are our main trading partners so will also reduce UK growth.