According to official figures, the UK experienced an unexpected contraction of 0.4% for the third quarter, showing that the UK is still stuck in the recession.

This quarterly contraction is the sixth consecutive contraction, the worst run of figures that UK gross domestic product (GDP) has experienced since records began 54 years ago.

The GDP of a country represents the value of goods and services produced by a country. The figures released may be altered at a later date, as this is just a first estimate.

The Office for National Statistics (ONS), had been expected to show quarterly growth of 0.2%. However, no growth in retail sales for September and a 2.5% fall in industrial output for August had dented people’s positive expectations.

Experts have revealed that one of the main causes of the contraction was an unexpected drop in the services sector, with distribution, catering and hotels generating some of the worst figures.

Nearby countries France and Germany exited the recession earlier this year, and it is generally considered that the UK’s reliance upon the services sector, and more specifically, the finances sector being the main reason.

The UK economy has now experienced a 5.9% contraction since its high point prior to the recession.

The Bank of England is set to re-think its quantitative easing plan after seeing such a poor result in GDP figures. Quantitative easing involves the Bank of England printing money to buy bonds from companies and banks in an effort to encourage positive activity in the economy.

HSBC’s Bronwyn Curtis spoke with the BBC, revealing that “back in August we had a worse-than-expected second-quarter GDP number and that is the reason that the Bank of England extended the quantitative easing programme,”

ING’s James Knightly felt that the data was “awful with no positive news” and “clearly suggests that the likelihood of an expansion in quantitative easing by £50bn or so over the next quarter is rising, although [it] is not a foregone conclusion.”

It is considered by many experts to be disturbing that measures taken by the government and the Bank of England have failed to make a positive impact. However, David Kern, the chief economist with the British Chamers of Commerce believes that “continued intervention – including help for businesses to access finance, and incentives to promote investment – is still needed.”

“Above all else, business confidence must be nurtured, to ensure that recovery is not further delayed.”

Whilst the general financial atmosphere is improving and optimism growing, it is too soon to announce that we are in the process of recovery, according to experts at Ernst and Young Item Club.

The influential professional services firm expects some growth towards the end of 2009, but this growth should begin to struggle, with 1% expected growth for 2010.

They also predicted that customers repaying debt will grow slower than first anticipated and impending tax rises will follow the election.

BT Business research predicted a more optimistic outlook, declaring that small businesses are positive about the forthcoming year.

In September, BT Business conducted a survey of over 7000 small businesses and found that 75% believed their business would see an upturn in 2010, with 61% confident about their business’ prospects.

Professor Peter Spencer, Chief Economist from the Item Club, issued a wake-up-call to all those getting carried away with the optimism of recovery.

He warned, “there could still be substantial pain to come for corporates and consumers.”

“For a sustainable recovery the UK economy needs world trade to pick up and there is still not much sign of that happening.”

One of the factors holding back growth is that the VAT rate will return to 17.5% from its current level of 15% on 1 January, a change which may see consumers making purchases before the New Year.

Several other factors which will hold back growth lie on the horizon. An increase in national insurance contributions, the new 50p tax rate, the termination of the car scrappage scheme, tighter government spending and the return of stamp duty on housing are all due to hit the country.

Judging whether the recovery is happening, on the way or unlikely is difficult to forcast.

Professor Spencer went on to tell the BBC that the recent economic data has been “very mixed,” adding, “the stock market is absolutely rampant, industrial surveys all back in positive territory, but it’s yet to show through in hard data for output and things like that.”

“And when it comes to lagging indicators like unemployment, I’m afraid it’s going to be ‘feel bad’ for quite some time to come.”

On Friday, the official statistics for the Gross Domestic Product (GDP) are released, with many expecting no economic growth at all.

GDP is a measurement of the services and goods produced in a country, and since the first quarter of 2008, the UK GDP has been in negative figures.

The Bank of England has focused on quantitative easing, an act of pushing money into the economy. Professor Spencer feels that this has been of little success, with the little improvement on bank lending, going on to complain that “instead, the banks appear to have used much of the money to rebuild reserves and improve liquidity.”

Lloyds Banking Group announced on Friday that it has reached an agreement to sell its estate agency arm, Halifax Estate Agencies, to LSL Property Services for just £1.

The sale of Halifax Estate Agencies (HEA) will result in the closure of approximately 121 Halifax banking counters which are situated within the estate agency chain’s branches, potentially causing 460 people to lose their jobs as a result.

With 218 branches, HEA is the fourth biggest network of estate agencies in the UK. The lack of residential property sales saw a pre-tax loss of £2m, a dramatic drop from their £34m profit in 2007.

HBOS became acquired by Lloyds during a controversial deal made earlier this year.

Lloyds released a statement on Friday, stating that the decision to sell was made as a result of considered reviews by the bank and “concluded that an estate agency operation is no longer integral to its business model”.

The decision comes after measures were made in August by Lloyds announced it was to sell its Insight asset management business to Bank of New York Mellon for £235m.

In efforts to gain approval from the European Commission for aid from the UK government, Lloyds are expected to make big cuts.

LSL currently own a range of estate agencies, such as Your Move, Reeds Rains and InterCounty. The addition of HEA would result in 584 branches and increase their estate agency portfolio to become the second-largest estate agency network in the UK.

LSL considers HEA to have been run to primarily distribute financial services products and held great potential for their business.

“This is a significant opportunity for LSL to acquire a high-quality branch network, an established asset management business and pipeline of sales on favourable commercial terms at a low point in the economic cycle.”

Shares in LSL increased by 5% to 275p and Lloyds shares increased 3.4% to 94.52p during early Friday.

The deal is expected to be completed in January 2010, and include approximately 1050 HEA staff transferring to work for LSL as a part of the agreement.

On Friday, a statement was released by LSL suggested that the acquisition of HEA had been traded ahead of management expectations made in July, with turnover for the 8 months up to 31 August, down by 18%.

LSL revealed that they await the results of 2010 with caution, confessing that “any recovery is likely to be constrained by the availability of mortgage credit and general economic backdrop.”

Official statistics show that one of the main measures of inflation has reached its lowest point since September 2004, another sign of sterling weakening. The annual rate of 1.1% in September was lowered from 1.6% in August by the Consumer Prices Index (CPI).

A separate measure of inflation conducted by the Retail Prices Index (RPI) found that mortgage interest payments and housing costs also dropped, from -1.3% to -1.4%.

The pound also reached its lowest point in the past six months when it fell 0.5% against the Euro to 1.0628 Euros and to a five-month low of 1.5730 US Dollars.

Weak

Duncan Higgins, a senior analyst for Caxton FX, felt that “this is bad news for the pound.”

“The CPI figures will weigh heavily on the UK currency and will continue to discourage investment.”

A report conducted by the Centre for Economics and Business research predicted UK interest rates would not rise above 0.5% until 2011 and fail to meet the 2% mark until 2014; a further damnation to the outlook for the pound.

Meanwhile, the strength of the UK economy was dealt a further blow last week when it was revealed that industrial output dropped in August.

A prediction for the GDP had to be recalculated by the National Institute of Economic and Social Research after the UK economy failed to grow during the June/September quarter.

However, the economy is still very “frail” according to the British Chamber of Commerce (BCC), despite business confidence improving.

In an effort to sustain a stable broader economy and prices, the Bank of England is making efforts to retain 2% CPI inflation. Should the CPI inflation drop below 1%, the governor of the Bank of England must provide a written explanation to the Chancellor, Alistair Darling.

High energy prices a year ago, in comparison to lower energy prices this September are being blamed for the recent fall in inflation. The Office for National Statistics (ONS) reported that electricity, gas, and other fuel bills tumbled by 7.3%. Energy costs have started to level more recently, with little change from August to September.

Jonathan Loynes from Capital Economics predicted that we can expect to see CPI back at the 2% mark by the start of 2010, due to increased energy prices and VAT returning to 17.5%. He does believe that a “huge amount” of unused production capabilities would keep inflation down and “keep alive the threat of a period of outright deflation late next year or beyond.”

In contrast, Keith Wade of Schroders UK forecasted that it “probably will be the low point in inflation.”

The Council of Mortgage Lenders (CML) has revealed that the number of new mortgages granted for August is down by 3,000 from 56,000 in July to just 53,000.

Despite such a large fall in granted mortgages, this is still 29% higher than last year’s figure for August.

The CML believe that house sales may have reached a plateau, as most first-time buyers still have to provide large deposits.

Overall, the total value of mortgage lending for buy-to-let and remortgaging for the past year is down by 36% on last years figures.

Long Recovery

The CML’s economist, Paul Samter believes “house purchase activity has revived from its moribund state at the beginning of the year.”

“It will be a drawn-out recovery process with seasonal ups and downs, but house purchase activity is now on a firmer footing.”

According to the CML’s figures, first-time buyers need to find on average 25% deposit in order to receive a home loan.

Regardless of whether a borrower is a first-time buyer or not, two-thirds of all mortgage deals require at least a 25% initial payment.

Relaxing

The Bank of England has claimed that the number of new mortgages approved in August, but not lent, has fallen for the first time in eight months.

From 52,317 approvals, down from 52,404 in July, is a sign that levels may be beginning to level off in the coming months.

Data shows that the number and value of house purchase loans is higher than a year ago, the total value of mortgage lending has dropped by a third.

Standard variable rates are very low, giving borrowers much less incentive to remortgage their house or seek out fixed rate mortgages elsewhere. Buy-to-let mortgages are also down  on a year ago.

“At £12.3bn, gross mortgage lending - which encapsulates all mortgage lending activity, including house purchase, remortgage and buy-to-let lending – declined 36% from August 2008,” the CML reports.

House Prices

The autumn of 2007 saw the onset of the credit crunch, with house prices taking a sudden downturn. Over the past few months, house prices have been steadily rising, giving hope that the recent recovery may become more prolonged.

House prices rose by 2.8% in the 3 months leading up to September, in contrast to the 3 months prior according to the Halifax; the first quarterly increase for two years. Further support to the encouraging recover was made when the Nationwide confirmed that house prices have risen continuously for the past 5 months and have returned to the level of September 2008.

Sales have doubled between January and August and the market seems much more stable in comparison.

Experts have warned, however, that the rise in house prices is supported by the shortage in new properties being put on the market. If there is a sharp rise in houses placed on the property market, the rise in house prices may come to a sudden halt.

Outvoted

Bank of England Governor Mervyn King, had this month been outvoted by fellow policymakers when it comes to the idea of pumping more money into the economy.

Minutes from the latest meeting of the Bank’s Monetary Policy Committee (MPC), show that Mr King wants to inject £75 billion into the economy instead of the £50 billion that was injected. Two other committee members also voted for a larger cash injection.

However, the decision reached was to pump £50 billion into the economy – a surprise as this is twice the amount that the market expected.

Initially, the Bank set aside £150 billion for buying assets. The decision to inject another £50 billon will take the total to £175 billion.

The governor, backed by Tim Besley and David Miles voted for a £75 billion expansion. They argue that too little stimulation would mean inflation remains below 2% for a “sustained period of time… and might harm public confidence in the recovery, causing it to falter.”

Too Much, Or Not Enough?

They also claim that if £75 billion proved too much, they could always reverse the policy by selling assets and increasing interest rates.

Because of the minutes, the value of the Sterling fell sharply. It fell 1% against the dollar, and 0.8% against the euro.

The Bank has previously been buying assets from financial institutions in order to get some more money back into the economy, with the aim that these institutions would then lend some of the money they made to businesses and individuals. Thus, in turn, boosting spending and helping the economy out of the recession.

Following the committee meeting earlier in the month, the Bank issued a statement saying that the recession in the UK “appears to have been deeper than previously thought.”

But the split within the MPC shows that views differ on just how deep the recession is, and the outlook for inflation.

‘Promising Signs’

Analysts warn the different views mean the Bank might pump even more money into the economy: “It was surprising we had three members looking for £75 billion,” said Peter Dixon of Commerzbank.

“This clearly suggests the Bank is leaving the door open for additional measures should they feel need arise. Quantitative easing is still very much in play.”

Capital Economics said the minutes “gave a strong signal that QE might yet be extended even further.”

The committee also noted that stock markets had increased, and that the rate at which banks lend to each other had fallen. On top of this, it says there are “promising signs” that quantitative easing was “having a positive impact”.

Even then, the committee warns lending conditions will remain tight and economic activity weak and the “recovery in global demand remained susceptible to further shocks,” which would most likely lead to “a slower recovery in the level of economic activity.” Therefore more action needs to be taken.

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Tax Rises To Cover Deficit

The net government will have to raise taxes and cut spending in order to balance out the deteriorating state of public finances according to think tank group Centre for Economic and Business Research (CEBR).

The group proposes a programme be put into effect in order to put £100 billion back into the economy and repair the UKs public finances. It says that by 2014/15 the government need to get the UKs budget deficit down to £50 billion.

In 2008-2009, the UKs budget deficit was a record high of almost £90 billion.

According to CEBR, if the Conservatives win the next general election as expected, the deficit will be stopped by £20 billion in tax rises, and another £80 billion in spending cuts.

More Economic Contraction Still To Come

If Labour, on the other hand, stay in power, it’s predicted there will be £40 billion in tax rises and £60 billion in spending cuts to bridge the gap.

CEBR chief executive, Douglas McWilliams says: “It is likely that any government – particularly a new one – will be forced by political necessity to announce its fiscal consolidation programme early while it is still possible to blame the need for it on the previous government. And it will look to achieve most of its results within a parliament.”

The group believes that the economy in the UK will continue to contract by 4.1% this year, which is a little more pessimistic than the official Treasury estimate of 3.5%. However, the CEBR also predict an eventual 0.6% growth for 2010, and another 0.9% rise in 2011.

Mr McWilliams says he believes that the recovery will be quite slow, which will mean lower tax revenues and more money needing to be spent on unemployment benefits.

What Do You Think?

Whose figures do you trust more – the governments or an independent groups? Are things going to begin to look up as early as next year? We want to know your thoughts and opinions. Leave your comments here.

Between April and June this year the number of profit warnings by UK-listed firms fell to their lowest ever second quarter level since 2003.

The report conducted by Ernst & Young said that there were 63 warnings issued by listed firms on the London Stock Exchange last quarter, which is 36% less than a year ago.

Ernst & Young said this may add to the feeling that the worst of the recession is behind us, but the economy still has a ‘difficult road ahead’

Economy Appears More Stable, But Still A Difficult Road Ahead

Keith McGregor of Ernst & Young said: “Many companies have withdrawn profit guidance due to a difficult forecasting environment, while three successive quarters of negative growth have diminished market expectations.

“Add in hamstrung banks and a lingering credit crunch, and it’s apparent that although the economy appears more stable and the outlook brighter than at any time in the past year, the UK plc still has a difficult road ahead.”

The report also found that profit warnings in the support services sector increased from 12 earlier in the year, to 17 this quarter. Ernst & Young said that they did not find this surprising due to the sectors size and “exposures to the vagaries of the cycle.”

Support services includes the recruitment sector, and is the largest FTSE industry grouping and makes up a very big part of the economy.

Only six media companies put out profit warnings in the quarter, compared to 13 firms a year ago. However, Ernst & Young believe this does not necessarily mean that the media recession is bottoming out.

It says that media companies have “cyclical challenges” including advertising and consumer spending cuts.

Unlikely To Be A Rapid Increase In Profit Warnings

Mr McGregor believes the number of profit warnings is unlikely to rapidly increase even if there is further contraction of the economy.

“In this scenario profit warnings should stay relatively low. However, if markets become buoyed by optimism too quickly, then we may see a further correction later in the year,” he said.

“But, still countering our ability to predict the outlook for profit warnings is the ongoing trend for companies to limit or stop their profit guidance.

“Whatever companies decide on public guidance, it still does not remove their obligation to report material events that may impact profit as soon as possible to the market.”

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Is it too soon to assume this is a good thing for the economy? We would love to know your thoughts and opinions. Leave your comments here.

The Joseph Rowntree Foundation calculates the cost of living for those living on minimum wage is rising faster than inflation.

It believes the cost for a single household on its low-income budget is up 5.3% this year. Pensioners and couples with children budget rose by 5%. This is primarily thought to be due to higher funds needed for food, fuel and public transport.

A quarter of households are thought to fall below what Rowntree calls the ‘minimum income level’ and the report warns that benefits paid to workers are below minimum income standards.

It does however, show that pensioners getting the full amount of pensioner credit receive enough to meet the minimum income standard.

The group created the baseline measure last year to determine the income people need in order to reach a ‘minimum socially acceptable standard of living’. This includes having ‘what you need to in order to have the opportunities and choice necessary to participate in society’.

These figures come from a survey distributed among the public about expenditure and essentials. The preliminary findings show that, despite the recession, the public still believe the ‘minimum standard of living should allow people in Britain not just to survive, but to play a full part in society.’

Singles & Lone Parents To Suffer

The group also notes that many people are worried that their incomes may not be enough to get them through the economic downturn while still meeting the minimum acceptable standard of living.

It also warns that people losing their jobs will have to survive on half of that minimum standard. On this, the survey showed that the average single person of working age will only receive benefits worth 42% of the minimum income needed. Lone parents with a child could receive 67% of the minimum.

It suggests the national minimum wage would have to be increased by £1 per hour to provide enough money to raise a single-earner household out of relative poverty.

The report attempts to raise debate about the level of what is considered relative poverty in the UK to above the government’s current poverty line of 60%. It also comes as the government prepares legislation to cut child poverty in half by 2020.

The report also suggests that relative poverty is likely to decrease or stabilise this year because of the recessions’ effects.

“This apparently beneficial effect on the poverty figures does not represent a real improvement in the living standards of people on low incomes,” it says. This is due to the cost of living increasing faster than for the average family.

It also says the standard of living could fall if the rate of inflation for those on minimum wage continues to be higher than general inflation rate. But people responding to the survey believe everyone should have access to items that meet key social needs, but there was scaling down when it came to how much should be spent to get these.

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Slashing Records Again

Between January & March the UK economy contracted 2.4%, the highest it has reached in 51 years according to the latest figures.

Initial estimates were for a 1.9% fall, so the situation is worse than analysts at the Office for National Statistics (ONS) previously expected.

The weakened output in the construction and manufacturing industries are being blamed for this sharp revision of decline that also indicated that the recession started earlier than previously thought.

The ONS now says that the recession began during the second quarter of 2008 rather than the third. Therefore, it has now been running an entire year.

All Areas Suffer

According to the ONS, compared to the first quarter of 2008, economic output shrank by 4.9% by the end of the first quarter this year – the biggest yearly fall recorded.

This means that it will also be more difficult for the Treasury to reach its forecast of 3.5% decline in the UK economy for the year that was made in this April’s Budget. Though the Treasury has said it will not be revising its forecast.

The 2.4% decline seen between January & March is the highest it’s been since 1958 when it shrank 2.6%. Though a decline of 2.4% was also seen in 1979 as well.

The output in construction also decreased in the first quarter of the year by 6.9%; manufacturing output fell 5.5%; and the service sector by 1.6% with banking and financial industries leading this fall at 2.5%. Real household disposable income also fell by 2.4% as saving rates also dropped to 3%.

Economy Extremely Weak

Senior economic advisor of Ernst & Young, Andrew Goodwin, said the figures were worse than expected.

He said: “We had expected a downward revision to GDP, given the plunge in construction output since the last quarter, but the scale of revision comes as a real shock, and highlights the extreme weakness of the economy in the early months of the year.”

George Osborne, the shadow chancellor said that GDP figures show that the recession has been “longer and deeper than we had thought”.

“This also means that in the future, unemployment will be higher and Labour’s debt crisis will be even worse.”

Vince Cable of the Liberal Democrats also said: “Rather than making promises on public spending that nobody believes, the Government must start making tough choices on whether it is going to cut spending or raise taxes to bring the economy out of the red.”

However, despite the revision for the first quarter of this year, it is expected that official figures for April-June will not be as bad as initially predicted. These are due to be published at the end of July.

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