The ONS published the latest GDP figures in October. The UK economy shrank by 0.4 per cent in the 3rd quarter – the sixth period of decline.

This preliminary data is very much a first draft, and future revisions can be expected. In general revisions are in the upwards direction, although the Q1 figure was revised significantly downwards.

The UK is now one of the last major economies to be still showing negative growth. China and India were never in recession, while Germany, Japan and France all showed positive GDP figures in the 2nd quarter.

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Mortgage Lending

The FSA has recently outlined proposed tighter rules on mortgage lending. Self-certification mortgages, which made up almost half of the mortgage market in 2007, will be banned and other measures include banning lending when potential borrowers show a number of risk factors, for example high loan-to-value combined with a poor credit history.

The intention of the reforms is to prevent excessive lending leading to dangerous house price bubbles. Necessarily this will mean less people are able to borrow for house purchases in the future.


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Unemployment flattened

In previous eInsights we have discussed the expected trends in unemployment as we work through the recession and eventually return to growth. Based on the conventional wisdom, unemployment is a lagged variable that continues to increase for some time after a recession is over. We have also noted that in this recession unemployment has been lower than we might expect because weak wages growth has absorbed much of the output falls that would otherwise translate into unemployment.

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Pound under pressure again

The pound has performed weakly compared to the dollar and the euro this year. After a slight uplift in May, UK exchange rates are again on the decline - and with the UK economy still being in recession, the pound remains under pressure.

Reasons for this are that interest rates are likely to be kept low by the Bank of England, as there are no signs of increasing inflation. It is also possible that the quantitative easing scheme will be extended in November, following a surprise extension in August by £50 bn.

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Low Inflation

The consumer prices index, the measure of inflation targeted by the Bank of England, has reached its lowest level in five years, now standing at 1.1 per cent. Producer prices are looking low compared to the recent past, and the RPI (which take account of mortgage interest payments) has been at an incredible low for the past 6 months. Even when we strip out the effect of interest rate cuts on mortgages, by using the RPIX, inflation still looks low at 1.3 per cent.

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