Is the UK economy falling back into recession?
While uncertainty in the global economy escalates the question remains whether the UK economy will slide back into recession. Soft economic data and dovish Bank of England meeting minutes reinforce the view that the UK suffers from a stubbornly slow growth.
The BoE continues to follow a loose monetary policy in an effort to boost an economy deeply hurt by recession. The country's sluggish growth was made more evident after second quarter Gross Domestic Product (GDP) shocked the markets by showing a disappointing 0.2% growth of the economy down from a 0.5% increase in the first quarter. To make matters worse, the Labor sector has also taken a massive hit. Unemployment in the UK is the weakest link in the UK's recovery path. Since the financial crisis began, a record high number of people lost their jobs or cannot find a job and, as a result, the country's unemployment rate rocketed to 7.9% in July from a previous 7.7%. This is the biggest increase in unemployed people in more than two years. In addition, the Office for National Statistics revealed that Jobless Claims jumped by more than expected in July rising by 37,100 from June. The disappointing figures indicate that the ailing Labor market is weakening adding pressure on the Bank of England to take serious measures.
It seems that BoE's move to keep the country's interest rates at low levels was a simple decision to make. Slow growth signals the need for lower interest rates. However, slow growth and unemployment are not the only serious issues that the UK is facing. The economy also suffers from a rising inflation. Consumer Price Index (CPI) revealed that the country's inflation rose as high as 4.4% in the month of July while the central bank's target is only at 2%. BoE forecasts inflation to hit 5% by the end of the year. An escalating inflation can hurt consumer spending and, in turn, can further cause a contraction of the economy. It is a very worrying economic situation for the UK as it is forced to deal with a slow growth as well as rising price levels. The central bank's main tool to fight inflation is by increasing the interest rates. But such move is not wise in a time while the economy battles to heal from the crisis.
On Wednesday, the Bank of England meeting minutes revealed a surprising turn in the vote which was split among the MPC members. The two hawkish members of the committee Spencer Dale and Martin Weale abandoned their arguments for an interest rate hike while the others argued for further monetary stimulus. The result was a unanimous decision of the nine MPC policymakers to keep interest rates at an ultra low level of 0.5%. Their surprising vote reflects growing concerns about the sluggish UK economic growth as well as the risk from the eurozone and US debt crisis. MPC policymakers also fear that the UK risks of falling in a dangerous stagflation phase. Stagflation is when an economy suffers from rising price levels and slow growth. It is a troubling economic state that an economy will find difficult to escape from. The central bank is now challenged to find the healthy balance between sluggish economic growth, rising prices and a problematic employment sector.
Please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone. This report is provided by easy-forex® for informative purposes only. In no way is it a recommendation by easy-forex® for you to engage in any trade. It is your sole responsibility and you will have no claims with regards to this report against easy-forex®. If you do not agree to this, you are strongly advised not to use this report. Hence, easy-forex® shall not be held responsible for any outcome of trading decisions, in regards with this report or similar reports.