Create a free account to continue

U.K. Economic Woes Could Point To Recession

British officials say their country is caught between international inflationary pressures and the tightening of the global credit market

LONDON (AP) -- Inflation is at its highest level in more than 10 years and home sales are at their lowest in three decades. Retail sales are down and consumer confidence is falling.

British officials throw up their hands, saying their country is caught between international inflationary pressures and the tightening of the global credit market. Even Britain's damp summer is getting its share of blame, accused by retailers, as usual, of keeping shoppers from their stores.

But economists say more serious, internal problems may be at work -- and that Britain risks slipping into recession if consumer spending slips.

"I think certainly there are outside factors at play," said Matthew Sharratt, a U.K. economist at the Bank of America. "At the same time there's no doubt that there are internal, structural forces at play that have made the U.K. economy very vulnerable."

Most dramatically, the bursting of Britain's housing bubble has robbed many Britons of an asset they could borrow against to spend on consumer goods. Prices have dropped by 9 percent since August 2007, according to Halifax, and real estate brokers are struggling to close deals.

Brokers sold an average of just 15 properties each during the three months ending in June, according to a report published by the Royal Institution of Chartered Surveyors Tuesday. It was the lowest number recorded by the institute since it began collecting data 30 years ago.

While Britain had little hope of controlling the soaring prices of oil, or copper, or aluminum -- driven largely by political instability or increased demand from India and China -- it has only recently acted to rein in public sector salaries or spending.

Reckless spending has also been reflected at the consumer level -- Britons are saving less money than at any time since 1959, according to a report released by the Office of National Statistics last month.

The increased spending have also left public coffers too light to deal with tough economic times, Sharratt said. Attempts to refill them with taxes on expatriate workers, cars, and lower-income Britons have been abandoned one after the other under fierce political pressure.

With inflation hitting a higher-than-expected 3.8 percent in June -- nearly double the central bank's target, Prime Minister Gordon Brown's spokesman spent Tuesday reminding reporters the spiraling prices were a global problem: Other countries, like the United States, were doing even worse.

One of the few bright spots in the British economy has been consumer spending. Retail sales scored a boost in May, but June figures released Tuesday by the British Retail Consortium showed a fall of 0.4 percent in compared to last year. Lousy British weather might be to blame, but economists say the general trend points to slackening demand for retail goods -- except for deep-discount supermarkets like Aldi, which reported sales for the last three months up 21 percent.

The BRC survey added to the "mounting evidence that consumers are now significantly reining in their spending -- either out of choice or out of necessity -- in the face of mounting handicaps," said Howard Archer, the chief U.K. and European Economist at Global Insight.

With an unpopular government strapped for cash and short of options, the Bank of England might be expected to fill in the breach by cutting rates. But with inflation at its highest level since the Labour Party came to power in 1997, high food prices and extremely expensive gas (fuel now averages US$8.50 a gallon) a rate cut seems unlikely.

"We've been getting used to unpleasant surprises on inflation over recent months," said Jonathan Loynes, chief European economist with Capital Economics. "But June's further rise ... will make it even harder for the (Bank of England) to deliver the cuts in interest rates the economy desperately needs."

Under the circumstances, what would it take to push the U.K. economy into recession?

"Potentially not much," Sharratt said.

More in Supply Chain