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.
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/