What the experts are expecting this year

There is no doubt that last year was a very turbulent one in terms of finances, and a combination of the effects of the global credit crunch, the recession, and the housing slump have all had a profound impact on the economy. Whilst many were hoping that the New Year would bring new hope of a revival in the economy it appears that things are set to get even worse in the eyes of some industry experts, and the whole nation faces a rocky year ahead.

Last year ended on something of a sour note in terms of the economy, with most well aware of the bleak outlook for the economy and in terms of things such as rising unemployment and soaring repossession levels. Whilst the Bank of England has been cutting the base interest rate aggressively in order to try and ease the situation for consumers, reduce the number of repossessions, and revive the economy many think that we could still be a long way from recovery.

In fact, things are looking bleak in many different areas for Britain. Holidaymakers will be disappointed by how weak sterling is against the Euro and the dollar, many people are nervous about the security of their jobs with unemployment set to soar, and many are worried about how they will keep on top of their mortgage repayments and other financial commitments in the current difficult financial climate.

A number of industry experts were recently interviewed by a leading financial company, and gave their views on what the future held over the course of this year in terms of areas such as unemployment, the economy, interest rates, and finances.

One expert, Jonathan Loynes from Capital Economics, stated: ‘The year will be marked by startling visible effects like deflation – consumer prices falling – for the first time since 1960. And what we see as the fastest contraction in the real economy since the 1940s. But the key cause-issue in the economy will be the degree to which banks start lending to each other and to business again – and this will determine the speed of the economy’s recovery: a continuing credit crunch will lead to a prolonged depression rather than a brief recession.’

He added: ‘Interest rates will drop to 0% – although a technical buffer may prevent the base-rate being put actually at 0%. And that will happen faster than most people think, in the next two or three months. Sterling will remain fairly flat in our opinion. There is a danger of more weakness in the near-term but most of the adjustment has occurred and there is even a possibility of some recovery – against the euro particularly – later in the year.’

Another official from Commerzbank, Peter Dixon, stated: ‘The UK stands on the verge of its worst recession since the early 1980s. Its dependence upon financial services and the public sector to drive growth and jobs will be a problem during the downturn as neither sector will perform well. The situation may feel worse than it did during previous recessions as the economy has been so stable in recent years that it will not take a big increase in volatility to raise insecurity levels.’

He went on to state: ‘The housing market collapse is ongoing and although we look for a 25% peak-to-trough correction, there is a good chance that matters could turn out even worse. Consumers will take a big hit from falling housing and equity values but real income growth may be buoyed up by a sharp fall in inflation. The key to the depth of the downturn will be the extent to which the labour market collapses, and the portents are not good. The massive loosening of fiscal policy will probably not make a big enough difference to growth in the near-term since it largely reflects a temporary tax cut which may not give enough of a boost at a time of weak employment. The BoE does, however, have room to cut interest rates further and could take them as low as 1% as CPI inflation undershoots the BoE’s target.’

He also added: ‘Sterling remains in dire straits as interest rate support diminishes. Parity against the euro is not our favoured scenario but in the spirit of ‘always expect the unexpected’ we cannot make this claim with any degree of confidence. To paraphrase former Chancellor Kenneth Clarke, the pound is – or was – ‘a Dolly Parton currency: An unbelievable figure blown out of proportion with no visible means of support’.’
Finally, Philip Shaw from Investec stated: ‘The defining feature of 2009 will be the extent to which banks begin to lend to each other again on the wholesale markets. If the credit market doesn’t free up then the second half of the year and beyond is looking bleak to us. If the authorities take further successful steps to get credit moving again then we will see the recession ease off after the first half so that in the second half of the year the economy should cease contracting. But the recovery will be slow.’

He continued: ‘It’s clear from recent Bank of England minutes that they still feel rates are too high and we think they will come down to 0.5-0.75%. But also we think the Bank will take ‘quantitative easing’ measures to pump liquidity into the economy. With rates having further to fall, the pound is still vulnerable and the currency markets obviously have a poor appraisal of UK fundamentals at the moment. But all industrialised economies are looking very fragile and we think the markets have oversold the pound and overvalued the euro.’

He also said: ‘They are underestimating the problems in the eurozone economy and the extent to which the ECB will be forced to cut rates next year. So the euro will reverse some of its gains and we will see the pound in a range of 1.15-1.20 by the second quarter. The dollar will be strongest of the three currencies in 2009, and we see sterling dropping to $1.40. But it will be another year of volatility and the second half could present a very different picture to the first.’