British business must believe that recession is immanent
Finally. a clean month ahead of us.
And more importantly, the Labour Day weekend is over and done with. This, theoretically, should mean that there are no more excuses as to why we are not seeing “proper” market behaviour. The summer is coming to an end – no more erratic, light-volume trading weeks, and full transparency well into next year.
Or maybe not. At least not until British business comes to terms with the fact that a recession is right around the corner, and that it could be quite a bit worse than what was seen in the 1990s. It should be of no surprise to anyone that the severity of a recession hinges on the consumer – with retail sales at a 25-year low.
Add on to this the Nationwide house price data with sharp drops continuing for the tenth month in a row. These facts should be enough to force retailers to think about how they best continue to cut costs, and to perhaps err on the side of caution when setting their own targets.
People have been forced to modify their spending patterns in order to keep up with rising bills elsewhere.
Although Bank of England Governor Mervin King thinks inflation will reach 5 per cent over the next few months, analysts we speak to think inflation will modify. Usually, if inflation falls, growth picks up. The difference for the Brits, however, will be if the housing market continues to suffer.
And this is why the Bank of England needs to step in at its next rate setting meeting on 4 September and cut rates from its current level of 5 per cent. Mark O’Sullivan, director of dealing at Currencies Direct says: “The BOE is staring into the abyss. David Blanchflower (BoE policymaker) is now looking for an aggressive rate cut, but by the time they cut rates, it will be too little too late.”
With the pound at 12- year lows against a basket of currencies, O’Sullivan goes on to recommend remaining short sterling at the moment, and says that the trend for the UK currency is down. Typically it can take up to 12 months for economic data to sift through into the real economy. If the BoE fails to act, what we are feeling now could make for grim reading for years to come.
Louisa Bojesen hosts Power Lunch Europe on CNBC