Coventry diary for this academic year

Britain is set to fall into recession this year
The UK economy will fall into recession during the second half of this year, according to the Organisation for Economic Co-operation and Development (OECD)

Britain is expected to perform the worst of the world's richest nations, with its economy predicted to shrink by 0.3 per cent in the third quarter and by 0.4 per cent in the final three months of the year.

The definition of a recession is two successive quarters of negative growth, according to the Paris-based economic organisation.

According to official UK data released last month, the economy came to a standstill during the second quarter of 2008. The longest period of uninterrupted economic growth in British history has ended, leaving the country on the brink of recession.

Almost two decades of increasing employment, disposable income and house prices ground to a halt in June, figures from the Office for National Statistics showed.

Now the OECD is forecasting that Britain will fall into a recession, although it does not use the word, while the US, Japan, Germany, France, Italy and Canada will slow, at worst, to a standstill during the rest of this year.

Jorgen Elmeskov, acting head of the economics department of the OECD, said that economic activity in the UK was expected to remain "broadly flat".

"Financial market turmoil, housing market downturns and high commodity prices continue to bear down on global growth," Mr Elmeskov said in comments accompanying the OECD's latest interim assessment of the economic outlook for the seven member nations.

“The eventual depth and extent of financial disruption is still uncertain, however, with potential further losses on housing and construction finance being one source of concern,” he said.

The US will see growth slow to 0.9 per cent in the third quarter and 0.7 per cent in the last three months of the year.

Europe’s biggest economy, Germany, will come to a standstill in the third quarter and edge ahead just 0.1 per cent in the fourth, the OECD said.

The OECD is forecasting the UK economy to grow by just 1.2 per cent in 2008, well down on its earlier forecast of 1.8 per cent.

Last month the International Monetary Fund predicted the UK economy would grow 1.4 per cent this year.

There have been a series of gloomy economic forecasts about the UK economy in recent months.

Mervyn King, Governor of the Bank of England, said last month that the country would experience at least one quarter of negative growth in the coming year, while the British Chambers of Commerce has explicitly warned that Britain’s economy wil enter a recession within the coming year.

Tthe pound slumped today to its lowest level against the euro since the single currency was introduced in 1999, following a warning from Alistair Darling, the Chancellor, that the UK was facing its biggest economic challenge for 60 years.

Mr Elmeskov said that the basic message from his organisation was that the economy of the G7 club of industrialised nations was very weak.

“Continued financial turmoil appears to reflect increasingly signs of weakness in the real economy, itself partly a product of lower credit supply and asset prices,” Mr Elmeskov said.

The monetary policies being pursued by central banks at the moment were appropriate in current circumstances, the OECD said, referring primarily to the United States and euro currency zone where the European Central Bank (ECB) sets rates for 15 countries.

The Federal Reserve has slashed US interest rates while the ECB’s last move was a rise.

Sterling slumped against the euro to 81.28p this morning, the lowest level since the single currency was introduced in 1999. It also lost ground against the dollar, falling to $1.79.

Investors are still reeling from comments from Alistair Darling, the Chancellor, who gave warning last week that Britain faced its biggest economic challenge in 60 years.

Business leaders have contradicted the Chancellor's remarks but they appear to have contributed to the weakening of market confidence.

Another factor depressing business confidence is the likelihood that the Bank of England will keep interest rates on hold at 5 per cent when it announces its interest rate decision on Thursday, despite hopes of a cut.

Hazel Blears, the Community Secretary, who will jointly present the housing proposals with Mr Brown, said today that the Government was aimed at "people who need just that little bit extra help to keep them afloat".

While most of the expected proposals are popular, they seem unlikely to be enough to guarantee a successful political fightback for Mr Brown after Labour's recent disastrous showing in local elections and rising dissent within the party.

Polls show that few people think that the housing measures will make a significant difference to their own situations.

Sterling is now the worst performing of the ten leading currencies this year, having fallen by more than 9 per cent against the euro since January amid mounting expectations that the Bank of England would cut interest rates.

Commenting on the housing proposals, George Osborne, the Shadow Chancellor, said: “We will look at the details of these measures and we will support those that will work. But let’s be clear, they are not going to help the vast majority of families facing a rising cost of living and falling house prices. Nor do they amount to the first instalment of the economic recovery plan we were promised.

“I suspect that what we will see in the coming weeks is a desperate and short-term survival plan for the Prime Minister, rather that the long-term economic plan the country needs.”

Call for sovereign wealth funds to go private
Some of the Gulf’s most powerful businessmen have called on the private sector to take over sovereign wealth funds (SWF) to improve their investment performance and increase transparency.

In a rare display of public criticism, Arab businessmen at the World Economic Forum (WEF) in Sharm el-Sheikh said that private-sector control of the multi-billion dollar oil funds would help reduce criticism from Western governments.

SWFs have become depositories for the vast wealth that Middle Eastern and other governments are gaining from rising oil and commodity prices.

An estimated $2.7 trillion (£1.36 triilion) is held by these funds, most of which is in the Gulf, and they have invested $60 billion in the western banking system in the past six months. This has helped to bail out institutions, such as Citigroup and UBS, after they suffered from sub-prime mortgage losses and helped to prevent a crisis in the banking sector.
However, Western governments are concerned that SWFs are being used as an extension of national interests and have demanded more transparency.

Saad Al Barrak, chief executive of Zain, the Kuwaiti mobile phone operator, said: "I don’t trust governments to get quality investments. Governments are the lousiest people in the world to make investment decisions or economic decisions and I have a big issue with sovereign funds for that fact. Oil revenue has to be owned by everyone. It is public wealth but it has to be managed by private companies. A lot of people in competition will make the best out of this wealth."

The criticism of SWFs by Zain, one of the fastest growing companies in the region, comes amid a growing feeling among leading Arabs that oil wealth should be used locally, rather than to bail out western banks.

Shafik Gabr, chairman of the Artoc Group, an Egyptian investment firm, said: "There is concern about the behaviour of SWFs. I am sure the recipients of the wealth are happy but there is concern about the motivation of Gulf countries and that will remain. The solution is to put it into the private sector and give it maximum transparency."

The Abu Dhabi Investment Authority, which is the world’s largest SWF with assets estimated at about $700 billion, is working with the International Monetary Fund to draw up guidelines on making funds more transparent.

Western politicians are concerned that the funds are buying strategic assets to shift intellectual property or jobs to the Middle East but the IMF plan has not been welcomed by all SWFs and it may not be adopted voluntarily.

Fouad Alaeddin, managing partner of Ernst & Young in the Middle East, said: "When SWFs were investing in bonds nobody cared but when they invest in equities everyone cares. Strategic clarity is very important. These funds have to show they have proper governance for their own sake."

http://timesonline.typepad.com/wef/