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Home loans remain cheap but holidays abroad will cost more
Martin Bentham, Home Affairs Editor23.10.09
The shock figures on the poor state of the economy today offer good and bad news for consumers.
On the positive side, the 0.4 per cent contraction in national output between July and last month, instead of an expected return to growth, brought predictions from the City that any rise in interest rates will be delayed until at least the end of next year.
That will bring some cheer to homeowners on variable rate mortgages, as well as to those seeking to pay off credit card debts and other loans, although savers will continue to suffer from low returns. Shares also rose in response to the figures.
But less encouragingly, the bleak figures revealed by the Office for National Statistics sent the pound tumbling further which will push up costs for people planning to travel abroad during the half-term holiday.
Long term prospects for sterling have taken a further knock and the exchange rate with the dollar and euro is likely to remain poor for the foreseeable future.
City economists had predicted growth of about 0.2 per cent but there are now predictions that the Bank of England will be forced to add £50 billion to the £175 billion it has already allocated to boost the economy which would worsen national finances.
Howard Archer, the chief UK economist of IHS Global Insight, said today's figures were “a real shocker” and “desperately disappointing”.
He added: “Serious economic and financial obstacles to significant, sustainable growth remain, and we suspect that economic activity will be muted and prone to relapses for some considerable time to come.
“High and rising unemployment, the need for consumers and businesses to improve their balance sheets, and ongoing tight credit conditions amid still-serious financial-sector problems are particularly worrisome.
“On top of this, economic activity will be held back over the medium and longer-term by the need for extended, major fiscal tightening to rein in the terrible public finances.”
Jame Knightley, of ING, said the figures were “awful with no positive news” and increased the likelihood that the Bank of England would have to expand its quantitative easing.
Vicky Redwood, of Capital Economics, added: “The fact that the economy is still contracting despite the huge amount of policy stimulus supports our view that the recovery will be a long, slow process.”
The 0.4 per cent contraction takes the total loss of output since the recession began last year to 5.9 per cent. It also means that the UK economy has shrunk for six quarters in a row — the longest period of continuous decline since ONS records began in 1955.
Although modest growth is still expected to return by the end of this year, pressure on the economy will intensify next year as the temporary VAT cut and the car scrappage scheme come to an end. Unemployment is also steadily rising towards three million.
Today's figures showed the pressure on consumers during the three-month period with output from distribution, hotels and restaurants down by one per cent. Overall service output, which represents almost three-quarters of the economy, saw a 0.2 per cent decline.
The construction sector fell 1.1 per cent, taking its total contraction since the start of the year to 14.7 per cent.
Industrial production output shrank by 0.7 per cent and is down by 13.7 per cent since the recession began.
