Recession: 1 in 3 chance of a double-dip Go compare with our comparison table

Recession: 1 in 3 chance of a double-dip

12 July 2010 / by Rebecca Sargent

Barclays Wealth has put the probability of the UK experiencing a 'double-dip' at one in three, claiming that the much talked about scenario cannot be ruled out.

Michael Dicks, chief economist at Barclays Wealth believes there are three factors that could prove particularly important. These include fiscal tightening, which he claims has a greater impact than generally expected:

"Look closely at the numbers, and you will see that fiscal effort will jump by more than two percentage points next year, driven largely by the in-your-face hike in VAT, but also affected by other tax changes and cuts in government spending and benefit payments," Mr Dicks said.

The Office for Budget Responsibility (OBR) believes that GDP growth will take a small hit when the VAT hike comes into play, but Barclays Wealth believes otherwise.

Exports are another area that Dicks believes will impact the UK's chances of a double-dip recession. He believes that while fiscal tightening is the order of the day, there won’t be many buoyant markets to export to – particularly in Europe.

He also raises concerns that UK exporters are less able to benefit from a falling pound than they have been in the past.

Finally, Dicks believes that higher inflation may require higher interest rates: "The general presumption is that tight fiscal policy will be offset by loose monetary policy for some time. However, inflation keeps surprising everyone on the high side – leaving one member of the Bank of England’s MPC suggesting hiking rates," he said.

If inflation was pushed up by an unexpected supply shock, the MPC may well increase interest rates, which could translate into a poor growth outlook for the UK.

Commenting, Dicks said: "All in all, we would say that it is more likely than not that the fiscal tightening takes the edge off of the recovery, rather than completely wrecking it. But, a double-dip scenario certainly cannot be completely ruled out."

© Fair Investment Company Ltd


Barclays Wealth has put the probability of the UK experiencing a 'double-dip' recession at one in three, claiming that the much talked about scenario cannot be ruled out.

Michael Dicks, chief economist at Barclays Wealth believes there are three factors that could prove particularly important. These include fiscal tightening, which he claims has a greater impact than generally expected:

"Look closely at the numbers, and you will see that fiscal effort will jump by more than two percentage points next year, driven largely by the in-your-face hike in VAT, but also affected by other tax changes and cuts in government spending and benefit payments," Mr Dicks said.

The Office for Budget Responsibility (OBR) believes that GDP growth will take a small hit when the VAT hike comes into play, but Barclays Wealth believes otherwise.

Exports are another area that Mr Dicks believes will impact the UK's chances of a double-dip recession. He believes that while fiscal tightening is the order of the day, there won’t be many buoyant markets to export to – particularly in Europe.

He also raises concerns that UK exporters are less able to benefit from a falling pound than they have been in the past.

Finally, Mr Dicks believes that higher inflation may require higher interest rates: "The general presumption is that tight fiscal policy will be offset by loose monetary policy for some time. However, inflation keeps surprising everyone on the high side – leaving one member of the Bank of England’s MPC suggesting hiking rates," he said.

If inflation was pushed up by an unexpected supply shock, the MPC may well increase interest rates, which could translate into a poor growth outlook for the UK.

Commenting, Mr Dicks said: "All in all, we would say that it is more likely than not that the fiscal tightening takes the edge off of the recovery, rather than completely wrecking it. But, a double-dip scenario certainly cannot be completely ruled out."

© Fair Investment Company Ltd
 

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