What Chance of a Double-Dip Recession?
With the FTSE struggling to keep its head above water, house prices beginning to plateau and a government intent on severe cutbacks, we examine the prospects of a double-dip recession in the UK and how the savvy spread-bettor might find the silver lining in this particular cloud.
Two months ago the FTSE 100 was spiking around the 5800 mark, and even the gloomiest of analysts were willing to suggest that maybe, perhaps, we might have hit cruising speed on the road to recovery. Then over the two-weeks straddling the end of April and beginning of May, a collection of disparate factors – home-grown political uncertainty, the eurozone market crisis, BP's nightmare in the Gulf of Mexico and ash clouds turning western Europe's airspace into a no-go zone – came together to throw a barricade across recovery road.
That slump reached a hair below 4900 on 25 May, and since then the FTSE has been trading sideways, bouncing off resistance at 5200 and support at 5000. The market looks like it's winding tighter, though, and the only question is whether all the energy in that tightly-wound spring will bump-start the stalled UK economy or catapult it back down into recession.
The European contagion
Looking at the financial papers, opinion on the UK's future prospects seems divided but leaning towards the gloomy end of the spectrum.
And the warnings are there. Finland is the first spectre looming over the UK's meagre feast, on last week's news that the country has become the first in the EU to suffer a double-dip recession. The European Central Bank, meanwhile, is scrambling to keep some of Europe's more unhealthy patients from joining Finland in the financial underworld. After a short period in which analysts appeared to be holding their breath for fear of fanning the flames, 15 June saw ratings company Moody's downgrade Greek debt to junk status and the warnings of default flare up again. Fears of an economic collapse snowballing across the old world don't end at the borders of the eurozone, however; with Europe being the UK's biggest trading partner, the resultant breakdown of import/export dynamism may well deal a killing blow to the UK's stuttering economic growth.
Home-grown concerns
Closer to home, on 14 June the freshly minted Office for Budget Responsibility (OBR) downgraded the March 2010 Budget's forecasts for GDP growth in the wake of the similarly new coalition Government's plans for heavy cuts in public spending. The OBR's figures also suggested that the cuts should have the desired effect, trimming half a percent off estimates of the 2010/11 UK deficit, but analysts have again expressed concerns that the proposed cuts could create a 'death spiral' of reduced growth forcing further cuts which result in reduced growth... and so on.
Without sufficient incentives for private demand to replace the losses in the public sector, a return to negative growth seems the most likely end. Even business lobbyists the Confederation of British Industry (CBI), while denying the country is heading back into recession, have stressed that the governmental cuts will make the road to recovery a long, slow and painful climb. If there is to be any growth at all, they say, it will be driven almost exclusively by the private sector - which means encouraging investors and consumers alike to put their money at work. The Government's proposed increases to VAT and capital gains tax, however, could be enough to damage consumer spending and investor confidence, crippling the principal engines of economic growth.
Is the housing market losing steam?
The Government's proposed CGT increase might also be a contributor to the drop-off in house prices over the last couple of months, as second-home owners and buy-to-let landlords hurry their properties onto the market in order to crystallise their gains before higher rates are brought in. Despite this increase in supply driving prices down, however, the number of actual transactions in May 2010 hit a 15-year low according to market analysts Acadametrics – while June might see a surge before the expected CGT hike kicks in, this lack of activity in a traditionally busy month seems to suggest that prospective buyers still see the market as overpriced.
At the same time, a report on 13 June from the National Housing Federation (NHF) suggested that the number of affordable homes built this year could fall by as much as 65%, as funding cuts and amendments to the planning system take their toll. While growth in property prices may be falling off, leaving the short-term prospects of the housing market up in the air, a shortage of affordable housing over the next few years seems likely to undercut any possible rise in house prices.
Take a position
Whether you see the UK economy clinging onto its hard-won recovery or sliding back into the mire of recession, with IG Index you can back your judgement on a range of financial markets.
We offer one-point spreads on the FTSE 100 and competitive prices on all other major global indices, as well as on individual shares and commodities. We also offer spread betting on UK house prices, so if you see the property market moving in a particular direction you can take a position and reap the rewards if correct.
To get started spread betting today, simply apply online. You'll also receive our free six-week TradeSense education programme, with online seminars and a wealth of information, free of charge.
Updated: 15/06/10
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.