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Huge Stock Market Losses Put UK Recovery at Risk: Economist

Following weak growth in the second quarter due to a number of one-off effects such as the UK royal wedding and the tsunami disaster in Japan, the UK economy can be described as fragile at best.

Big Ben
Don Klumpp | Iconica | Getty Images
Big Ben

Recent stock market drops could make things worse, according to an economist at Capital Economics in London.

“We are increasingly concerned that even our distinctly bearish forecasts for growth will not be met,” said Samuel Tombs, following Monday’s losses on the FTSE 100.

Given the effect of falling stock priceson household wealth, Toombs calculates that the recent drop in stocks equals to a decline of about 400 billion pounds in net financial wealth.

“The stock market crash after the dot-com bubble in the early 2000s, for example, did not lead to a fall in real household spending. But that was largely because falls in equity prices were offset by rises in house prices. The same is not true this time around,” said Toombs, who expressed relief that house prices have not followed stocks lower, yet.

“Assuming that equity and house prices now hold steady, the fall in households’ nominal housing and net financial wealth on its own points to a 2 percent or so fall in real household spending,” he said.

The other worry is that falling stock prices affect business confidence and put an end to share buybacks and hiring.

“All in all, then, the recent falls in equity prices underline the challenges facing the economic recovery over the next year,” Toombs said.

With his current prediction for growth this year and next at an already bearish 1 percent and 1.5 percent respectively, Toombs predicts the downside risks have grown rapidly in recent weeks.

Contact Europe: Economy

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