Warning that UK economy is heading into recession
THE economy is heading into recession and may face a slump on the scale of the early 1990s, according to Deloitte, one of Britain’s leading accountants. Another, KPMG, says more than half of businesses are planning job cuts.
Deloitte’s quarterly economic review examines the effect of the lower pound on industry and asks whether export-led growth will prevent a severe downturn. Roger Bootle, its economic adviser, believes it will not. He said: “While the sharp fall in the UK exchange rate seen since last summer should eventually lead to a period of better-balanced growth, like that enjoyed in the mid-1990s, it won’t prevent the credit crunch and a sharp retrenchment in corporate spending from sending the economy into recession.”
After figures on Friday showed that quarterly growth had fallen to 0.2% in the second quarter of this year, Deloitte says a “technical recession” of two or more consecutive quarters of falling gross domestic product is now all but guaranteed. “A full-blown slump like the early 1990s is not impossible if the labour market crumbles or interest rates end up rising rather than falling,” the report says.
It predicts that the Bank of England will be forced to cut interest rates to 3.5% next year, from 5% now, but even this will not be enough to bring about an early recovery.
KPMG’s quarterly national business confidence survey, meanwhile, shows that in the “dour” economic climate 53% of businesses intend to reduce headcount, against 29% three months ago. In all, 60% of companies intend to cut costs in response to the credit crunch.
“The clouds that were on the horizon in early spring are now right overhead, with businesses feeling the impact of this so-called ‘perfect storm’ of rising inflation, tightening credit conditions and plummeting consumer confidence,” said Malcolm Edge, head of markets at KPMG.
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