Have we seen the end of growth?

The UK economy ground to a halt during the three-month period to June 2008, according to August figures from the Office for National Statistics (ONS). This was the UK economy’s weakest performance since 1992, when the country experienced its last recession. The news follows months of speculation that the UK’s economy is about to hit the skids, and is likely to add to pressure on the Bank of England (BoE) to cut interest rates in order to help shore up the UK’s faltering economy.

According to the ONS, activity in every major area of the UK economy appears to have slowed down during the second quarter of 2008. Manufacturing activity contracted by 0.8%, exports fell by 0.5% and activity in the construction industry declined. The services sector – a major contributor to the UK’s economy – grew slightly during the quarter, but its rise of only 0.2% was far from encouraging. Meanwhile, business investment has fallen sharply as companies tighten their belts in preparation for tough times ahead. Elsewhere, household spending fell by 0.1%, compared with growth of 1.1% in the first three months of the year. House prices continue to fall, and business and consumer confidence show no sign of improving.

The UK economy is feeling the pinch amid soaring food and energy prices and the ongoing effects of the global credit crunch. With inflation (measured by the Consumer Price Index) running at a hefty 4.4%, the UK could be facing an unappealing environment of “stagflation”, in which prices continue to rise while economic growth stagnates. The news that the economy has stalled has added to existing speculation that the UK is already in recession; technically, a recession takes place when the economy has contracted for two consecutive quarters; nevertheless, the official figures are based on historical data, and reflect what has already happened rather than what is happening right now.

On 25 August, the BoE’s new deputy governor, Charles Bean, warned that the current economic downturn could “drag on for some considerable time”, adding his view that the UK’s slowdown is as challenging as that of the 1970s. Nevertheless, he appears to regard the current environment as a “transitory period”, emphasising that “we will get through the other side”. How soon – and in what shape – we reach the other side remains unclear. However, the question on many analysts’ lips is now not whether the economy is expected to deteriorate further, but by how much.

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