The R word: Are we heading to recession?

The R word is now being used as if recession is a certainty. But are we really heading to recession?

Official estimates show GDP growth – the level of expansion of the economy - fell to just 0.2 per cent in the second quarter of 2008, down from 0.3 per cent in the first quarter.

In order for a recession to occur – for the economists at least – there needs to be two consecutive quarters of negative growth in GDP. Will the UK suffer this?

For the R word to become reality, there are several unknowns – both known unknowns and unknown unknowns – clouding the horizon.

The reason we are heading for a downturn is a combination of the current crunch, making borrowing harder so hitting consumption and investment, along with rising oil and food prices.

Oil prices have risen for a number of reasons – the rising global demand amid low interest rates boosting consumption and developing world growing strongly, along with a degree of speculation – and while recently the price of $147 a barrel has fallen we are not returning to the prices seen even a year ago.

With rising food prices, high oil prices have pushed up inflation, meaning the Bank of England is unable to cut interest rates – which usually increases economic activity.

The floundering housing market is also demanding an interest rate cut – as a correction of as much as 20 per cent in property prices is in place.

And the housing market is just one victim of the credit crunch, which has seen mortgage borrowing fall to record lows as banks are unable raise funds to lend.

The squeeze on the property market and consumption through the credit crunch has put further pressure on the economy.

But will this lead to recession?

Opinions among economists are divided.

The National Institute of Economic and Social Research (NIESR) sees UK growth staying low and remain "relatively anaemic over the next three years" with the lowest period of growth since the recession of 1990-91.

However, recession should be avoided.

The NIESR economic review states: "After a long period of robust growth and low inflation, the economic outlook has darkened.

"Growth is slowing and inflation is rising."

But what should hold the economy up is falling value of the pound – meaning exporters will be more competitive and imports dearer.

Government spending – if maintained – should also hold up the economy.

Simon Kirby, NIESR senior research office, said: "It is up to the government to push the economy along. Without government spending growing, we expect to see the economy stagnate."

While NIESR is hardy upbeat, many others are predicting more gloom.

The CBI is warning we could be entering a 'technical recession', but confidence is with the exporters.

Ian McCafferty, chief economic adviser of the CBI, said: "I think the long-term outlook of exporters remains reasonable but, there is a great deal of uncertainty about how short-term demand will pan out.

"We have seen a sharp squeeze in real disposable income already over the course of this year and it's likely to get slightly more intense as a result of the increases in retail prices that we already know are in the pipeline, in particular in terms of domestic energy costs and, to some extent, food costs too."

The CBI Industrial Trends survey brought further bad news with manufacturers continuing to raise the prices of their goods, in the face of the fiercest cost increases since 1980.

While the CBI sees a possibility of a 'technical recession', Global Insight is predicting a 'mild recession'.

Howard Archer, chief UK economist at Global Insight, said: "We expect the economy to stagnate at best through the second half of 2008 and the early months of 2009 as consumers rein in their spending in the face of major headwinds and investment is pared back.

"Indeed, mild recession is now looking highly possible."

Analysts at Capital Economics meanwhile see the recession being "outright".

Paul Dale, UK economist at Capital, said: "The paltry 0.2 per cent rise in GDP in Q2 shows that the UK economy has weakened dramatically even before the full impact of the credit squeeze and the housing market downturn has been felt.

"An outright recession remains our central scenario."

The only joy that may come from the slowdown is a decelerating economy may be enough to bring down the current high and rising inflation without the Bank of England increasing interest rates.

So are we heading to recession?

Well maybe. But does it really matter what the economists say? What matters on the high street is if we can afford our mortgages as the cost of living increases and job prospects weaken.

The consensus is inflation will rise, then fall, next year, but not be low for a couple of years. Interest rates may come down next year – but there is a possibility of an increase this year. Unemployment is expected to rise.

More gloom is around the corner, be it technical, mild or outright gloom, so be prepared.

Daniel Barnes. Additional reporting Kelvin Goodson