OECD report: is the UK heading for a double dip recession?
Britain is at "significant risk" of a double dip recession according to the latest findings published by the Organisation for Economic Development and Co-operation. In its latest 'interim assessment report' the OECD has cut its expectations for growth among top Euro zone countries and the USA. The OECD forecasts that Europe's three largest economies (Germany, Britain and France) will contract by 0.4 per cent in that period as a whole - dragged down in particular by Germany.
The United Kingdom
The OECD does not specifically say that it is expecting negative growth in Britain . . . at least not yet! Britain will see a slowdown, which the OECD is estimating at 0.4 per cent annualised growth in the third quarter and 0.3 per cent in the final three months of the year. The quarter-on-quarter figures suggest that the OECD is forecasting quarterly growth of just 0.1 per cent for the UK in the third quarter of this year, falling to growth of 0.07 per cent in the final quarter. Based on these predictions, the UK economy would come to a virtual standstill in the second half of 2011. This is a significant downgrade from the 0.4 per cent quarter-on-quarter growth the OECD was forecasting in May. A senior economist and head of the UK desk at the OECD, commented on the predictions "the risk is significant" referring to economic contraction in the second half. "What we have seen is that data has been coming in measurably weaker than we expected, notably on the trade side. The support we expected from exports has vanished in the UK and that is mostly what has driven these downward revisions." In fact there have been almost five quarters of virtually no growth in the UK from the end of 2010. He added that "depressed market confidence over Eurozone fears, and a decline in consumer and business confidence had also taken their toll on the UK".
What about some of the other OECD countries
While the OECD says the risk of contraction has risen, it does not expect "a downturn of the magnitude of 2008/2009." Nevertheless, these figures clearly predict a sharp slowdown in the growth of many developed economies by the end of the year. The OECD expects Germany's economy to see the biggest hit, with annualised growth of 2.6 per cent, in the third quarter, before contracting by 1.4 per cent in the final quarter of 2011. The US economy will see annualised growth of 1.1 per cent in the third quarter, slowing to just 0.4 per cent growth in the fourth quarter. The OECD said: The recovery almost came to a halt in the second quarter in many OECD economies. And downward revisions to earlier published data point to weaker underlying activity economic than had previously been thought.
Are we heading for a double dip recession or an “L” shaped recession?
Traditionally, an “L” shaped recession occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. From a stock market perspective, an “L” shaped collapse in share prices occurs when they drop substantially followed by a rather long period where share price clearly bottom out and top in a distinct flatish channel, making the shape of an “L”. In comparison, a double dip recession is shaped as a “W” whereby the top of the middle part of the “W” is not a point rather a flat period. The first leg down in a "W" shaped recession refers to a gradual downturn, which can take up to two years. This is often followed by a steep stock market bounce.
Between 2007 and 2009, the economy steadily declined, with the stock market going down at a "45 degree", to drop circa 60% over two years. Eventually, the FTSE100 bottomed out at 3500 levels. In March 2009, the markets bounced for six months till September 2009 when stock markets where approximately 60% up. At the same time, the wider economy recovered somewhat. However, rather than moving to full recovery, during a double dip recession, the economy, as well as the stock market, embarks on a relative flat period which can last six months, two years, or even much longer.
Instead of stimulating their economies, during such periods, governments decide on deep spending cuts causing the economy to slowdown and eventually for growth to go negative . The latest OECD estimates clearly confirms that we are at this stage of the "W" shaped recession. Unfortunately, the outcome is all but predictable. Once it becomes clear that the recovery is all but illusionary investor confidence will decline sharply - a major sell-off in shares will take place, taking everything with it down. Some economists fear that this kind of “second leg down” is still ahead of us. On my site, there's a detailed description on how a “W” shaped – double dip recession develops and ends.
About the Author's Book
The Guide details a straightforward system of investing in high quality blue-chip companies with reliable dividend histories and prospects. The Guide discusses when to buy and sell a company’s shares when its dividend yields instruct you to do so. ...read more or visit website »
Disclaimer:
Steven Dotsch - Managing editor - http://www.dividend-income-investor.com - Guide to Dividend Investing, at: http://www.dividend-income-investor.com/guide-to-dividend-investing/ - Dividend Value Profiles, at: http://www.dividend-income-investor.com/british-american-tobacco/
12 Comments on this Article show/hide all
Link not working at bottom of article.
Click here for a detailed description on how a “W” shaped – double dip recession and stock market looks like.
Sorry, still not working; perhaps this one: http://www.early-retirement-investor.com/w-shaped-recession.html
I can't quite get from your article whether the OECD are talking about a 'double dip' recession or whether it's your term used in the light of the OECD report. Can you please explain?
It would also be helpful to have a link to the OECD report?
Hi Fuiseog
Thank you for your comments.
As far as I am aware the OECD hasn't confirmed yet that the UK is in a double dip recession. That's my interpretation of the facts.
For further information:
http://www.oecd.org/document/18/0,3746,en_2649_37443_20347538_1_1_1_37443,00.html
Earlier today Bank of England policymaker Martin Weale has confirmed that the outlook for Britain's economy has worsened in recent weeks. The chances of us running into a double-dip recession are now higher than they were in July, he warned.
Speaking to Reuters Insider television, he said
"Looking at what's happened in the last two months or so anyone would have to say that it (the risk of recession) is greater than it seemed in July.
So when I come to the October meeting I will have to form view about what is the bigger risk - the high level of inflation that's well above target and has been well above target for a long time or the fact growth prospects do seem to have worsened in the last few weeks.
I would consider more asset purchases were warranted if it seemed likely that inflation was substantially going to undershoot the target."
Today, the International Monetary Fund has warned that there is a 17% chance of a 'double dip' recession in the UK. See: http://www.imf.org/external/pubs/ft/weo/2011/02/
I think a double dip is pretty inevitable, whether we maintain austerity cuts or not. The libdem /Labour proposition that a recession can be avoided by reducing the speed of the cuts(which if you look at them are barely cuts!) is a fallacy designed to appeal to those it thinks it can win over. Nothing about national interest at all and what this country needs.
European export markets are looking more and more likely to implode - At least 50% of our exports go to Europe and 40% odd of theirs come to us. So all we can do is to make sure our finances are in as best shape possible to weather the hit.(Given the profligacy of Labour that is going to be a big ask.)
What we need is more public sector cuts, far too many non jobs created by Labour(some 800,000) of which a great proportion were in the vein of such pointless positions as diversity officers,paying 60k per year + benefits if the Guardian ads were anything to go by. The lie that cutting such jobs would lead to greater costs, through unemployment benefit/ JSA, further burdening the country's finances conveniently fails to take into account the large salaries saved, the disappearance of "expenses", the taxpayer no longer having to pay for all those other perks attached to the position. Cheap at half the price if you ask me to make at least 70% of those pointless non frontline jobs redundant. The savings would far outweigh the cost of welfare these people would be entitled to.
But of course to propose such cuts sees one labelled immediately as a Tea Partyist intent on cutting front line important services. Public sector wages are out of control in many areas.
The cuts to waste don't go far enough in my view.
S&P sees downgrade blitz in EMU recession, threatening crisis strategy
Standard & Poor's is to warn that a double-dip recession in Europe would imperil France's AAA rating and set off a string of downgrades across Southern Europe, undermining the EU's debt crisis strategy.
See: http://www.telegraph.co.uk/finance/financialcrisis/8839972/SandP-sees-downgrade-blitz-in-EMU-recession-threatening-crisis-strategy.html
The report said a double-dip recession would lead to a downgrade of "one or two notches" for France, Spain, Italy, Ireland and Portugal, both because of tumbling tax revenues and the extra costs of propping up banks
British economy may already be contracting, warns MPC's Martin Weale
"In an uncharacteristically bold statement for a member of the MPC, Mr Weale said the country is experiencing the weakest recovery of any recession since the First World War, and intimated that there is a higher risk of a double-dip recession than previously thought."
More at; http://www.telegraph.co.uk/finance/financialcrisis/8847034/British-economy-may-already-be-contracting-warns-MPCs-Martin-Weale.html
Paul Fisher, a member of the Bank's nine-strong Monetary Policy Committee (MPC) warned today in an interview with Bloomberg Television that . . . "The likelihood of another UK recession is "significant", even if eurozone leaders manage to contain the region's debt crisis"
Fisher also said there was "a 50-50 chance the economy would contract in the final three months of the year".
"Looking at the fourth quarter, at best it seems to be flat, [and] could easily have negative growth, so the technical outcome of two quarters of negative growth in a row could quite easily come about"
Still. . . UK declared a "safe haven"!
"If people did not have confidence in the UK you would not see gilt yields as low," he said. "The UK is being seen at the moment as a relatively safe haven," Fisher said.
Amazing!
£50bn black hole as UK seen sliding back into recession
Weak growth has blown a £50bn black hole in the Chancellor's deficit reduction programme, according to the Organisation for Economic Co-operation & Development (OECD).
More at: http://www.telegraph.co.uk/finance/financialcrisis/8921676/50bn-black-hole-as-UK-seen-sliding-back-into-recession.html
And with the public sector strikes tomorrow I wonder if the strikers will finally realise what dire straits this country is in.....doubt it. Bout time many of them bore some of the pain, both on salary front as well as more realistic pensions - they have benefitted from 11 years of Labour largesse.Time for a spot of reality imv.
Grim reading.