What Chance of a Double-Dip Recession?

With the FTSE struggling to keep its head above water, house prices beginning to plateau and a glut of government cutbacks gathering pace in the lead up to the emergency Budget, we examine the prospects of a double-dip recession in the UK and how the savvy trader might find the silver lining to this particular cloud.

Two months ago the FTSE 100 was soaring up around the 5800 mark, and even the most pessimistic of analysts were willing to suggest that maybe, just maybe, the UK economy might have gained enough momentum that the recovery would take care of itself. Then over a fortnight bridging the handover from April to May, a motley crew of disparate factors – electorial impasse, eurozone debt, free-flowing oil in the Gulf of Mexico and Icelandic ash keeping Europe's airlines firmly grounded – littered the road to recovery like landmines.

That slump reached a hair below 4900 on 25 May, and since then the FTSE has been trading sideways, bouncing off resistance at 5200 and support at 5000. The market looks like it's winding tighter, though, and the only question is whether all the energy in that tightly-wound spring will bump-start the stalled UK economy or catapult it back down into recession.

The European contagion

Opinion on the UK's future prospects seems divided, but in the financial papers there seems to be a tendency towards the gloomy end of the spectrum.

And the warnings of a second dive into the red aren't hard to find. The first spectre looming over the UK's meagre feast is a Finnish one, as that country last week became the first in the EU to suffer a double-dip recession. The European Central Bank (ECB), meanwhile, is scrambling to keep some of Europe's more sickly patients from joining Finland in the financial underworld. After a fragile peace in which analysts tried to work out whether the ECB's first-aid measures had been enough to soothe a feverish eurozone, 15 June saw ratings company Moody's downgrade Greek debt to junk status and the warnings of default flare up again. Fears of an economic equivalent to the black death clawing its way across the old world don't end at the borders of the eurozone, however; with Europe being the UK's biggest trading partner, the resultant breakdown of import/export dynamism may well see the taint leap the Channel to deal a killing blow to the UK's weak economic growth.

Home-grown concerns

Europe may be the most obvious threat to UK stability, but reports from closer to home suggest the first symptoms of infection may already be showing. 14 June saw the freshly minted Office for Budget Responsibility (OBR) downgrade the March 2010 Budget's forecasts for GDP growth in the wake of the similarly new coalition Government's plans for heavy cuts in public spending, and while the OBR's figures indicated that the cuts should have the desired effect, trimming half a percent off estimates of the 2010/11 UK deficit, analysts have again expressed concerns that the cure could be worse than the disease.

Economists are concerned that the proposed cuts could create a 'death spiral' of reduced growth forcing further cuts which result in reduced growth... and so on ad infinitem. Without sufficient stimulus for private companies to take up the slack produced by a soon-to-be-ailing public sector, a return to negative growth seems the most likely prospect. Even business lobbyists the Confederation of British Industry (CBI), while denying the country is heading back into recession, have stressed that too-deep cuts are likely to make recovery road a long, slow and painful climb. Any growth will be driven by the private sector - which means encouraging investors and consumers alike to put their money at work. The Government's proposed increases to VAT and capital gains tax, however, could be enough to damage consumer spending and investor confidence, crippling the principal engines of economic growth.

Is the housing market losing steam?

The Government's proposed CGT increase might also be contributing to the drop-off in house prices over the last couple of months, as second-home owners and buy-to-let landlords hurry their properties onto the market in order to slip through the CGT window before it narrows to a crack. Despite this increase in supply driving prices down, however, according to market analysts Acadametrics the number of actual transactions in May 2010 hit a 15-year low. While June might see a surge before the expected CGT hike kicks in, this lack of activity in a traditionally busy month could be an indication that buyers see further potential for prices to fall and are waiting to snap up a bargain.

At the same time, a report on 13 June from the National Housing Federation (NHF) suggested that the number of affordable homes built this year could fall by as much as 65%, as funding cuts and amendments to the planning system take their toll. While the short-term prospects of the housing market may be up in the air as prices lose momentum, a construction slump now could mean a shortage of affordable homes in a few years' time; something with the potential to undercut any recovery in the housing market further down the line.

Take a position

Whether you see the UK economy clinging onto recovery by its fingernails, or losing its grip and sliding back into recession, with IG Markets you can back your judgement with CFD trades on a range of financial markets.

We offer two-point dealing spreads on the FTSE 100 and competitive prices on all other major global indices, as well as on individual shares and commodities. We also offer CFDs on UK house prices, so if you see the property market moving in a particular direction you can take a position and reap the rewards if correct.

Find out why IG Markets is the UK market leader in CFD trading, or learn more about CFD trading with our educational seminars. Alternatively, simply apply online to get started trading CFDs today.

Updated: 17/06/10

The above comments do not constitute investment advice and IG Markets accepts no responsibility for any use that may be made of them.