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It’s difficult to watch the television, read newspapers or generally go outside of your home right now without being bombarded with negative news on the economy. The US economy is all but in recession, New Zealand is already in recession, Japan is in recession and as of today so is the United Kingdom.
The Governor of the Bank of England has predicted no growth in the UK in 2009 and believes that the recession will be as bad as the early 1990’s. The British Pound has hit a six year low against the Euro and inflation in the UK is currently at 5% (the target set by the Bank of England is 2%).
Deflation is now a real threat in the UK which can be just as concerning as inflation. Deflation refers to a general decline in prices, often caused by a reduced supply of money or credit. It can also be caused by a decrease in spending by Governments, consumers or investors. Deflation is simply put as a decrease in price due to decreased demand – therefore the decreased demand results in decreased production and increased levels of unemployment.
With this deflationary threat looming it is likely that we will see interest rates continue to fall with some economists predicting UK interest rates will drop to around 1%. The recent massive 1.5% rate cut in the UK and two consecutive monthly cuts in Australia (1% and 0.75% respectively) are sure signs that central banks have finally seen just how serious the current situation is. I believe it’s a perfect time to purchase property safe in the knowledge that interest rates are going down – this is a wonderful situation.
FYI: Read related articles on Recession; the UK; or Buying Real Estate
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The economic storm is penetrating every corner. The Bank of England’s Monetary-Policy Committee (MPC) has pulled of shock when most thought there are almost no surprises left: it has cut UK interest rates by 1.5% leaving them now at 3% – the lowest level since 1955.
The boldness should be commended, although it clearly demonstrates that they were shocked themselves by the rapidity of the UK’s contraction, as well as the global downturn. Though consumer-price inflation, at 5.2%, is high, the bank reckons that the collapse in commodity prices and the prospect of weaker growth means there is now a “substantial risk” that inflation will fall below its 2% target.
Furthermore, British GDP fell at an annualised rate of 2% in the third quarter, factory output fell for a seventh successive month in September, new-car registrations fell by 23% in the year to October, and house prices fell by 2.2% in October leaving them 15% lower than a year earlier. Things are indeed looking grim.
Also this last week the International Monetary Fund (IMF) revised its economic outlook stating that it envisages Britain’s economy shrinking by 1.3% in 2009, and that of the euro area by 0.5% – the European Central Bank has also just cut rates by 0.5% perhaps indicating that the ECB is not recognizing the global tsunami soon enough. Simon Turner
FYI: Read more articles on the Credit Crunch, Interest Rates, and the Economy
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