After Labour’s drubbing in last week’s elections, Gordon Brown says he feels the public’s “hurt” over Britain’s “difficult economic times”. In which case, he is likely to be in severe pain before too long as the outlook is worsening by the day.
Even if the worst of the financial crisis is over, as the Bank of England argued last week, “most of the pain in the real economy still lies ahead”, said Michael Saunders of Citigroup.
Weakness across the board
“Pretty much every industry you look at is suffering,” said Damian Reece in The Daily Telegraph. The widely-monitored CIPS index of service sector activity (covering everything from finance to hairdressers) fell to a five-year low of 50.4 in April, only marginally above the 50 level that separates growth from contraction. The sub-index of services firms’ business expectations tumbled to the lowest level since October 2001. Following surveys highlighting similar weakness in manufacturing and an outright decline in construction, this implies growth slowing to 0.3% in the second quarter, a further slide from January-March’s three-year low of 0.4%.
Meanwhile, the Nationwide consumer confidence gauge slid to the lowest level since its inception four years ago. There seems scant prospect of a recovery in confidence amid weakening retail sales and the grim housing market.
Housebuilder Bovis Homes issued a profits warning this week, citing “absolutely awful” conditions as mortgage lenders have continued to tighten credit. The credit crunch is hitting demand by reducing mortgage approvals, and this is now being reflected in falling prices, said Capital Economics. The correction is “only in its early stages”, given further weakness to come in the overall economy and the labour market. Expect a 20% slide in prices by the end of 2009. Talking of labour market weakness, KPMG has just reported a decline in an index measuring permanent placements in April.
More danger ahead
The credit squeeze is reducing the impact of interest-rate cuts, as Capital Economics pointed out, and sticky inflation will prevent the Bank of England cutting rates rapidly in an attempt to shore up the economy. Oil has reached a record $122 a barrel, and a Goldman Sachs report this week warned of a “super-spike” to $200 as production fails to keep pace with soaring demand. Higher oil presages higher utility bills, compounding the squeeze on consumers, and further darkens the growth outlook.
A rise to $150 a barrel would snuff out a modest recovery next year, trimming growth to 1.1%, says the Ernst & Young Item Club; with oil at $200, “all bets may well be off”. Brown’s hopes of a solid recovery by 2010 are looking increasingly forlorn.