'Double dip' fear and US property price slide send shares plunging
Martin Weale, the newest member of the BoE's monetary policy committee (MPC), feared the central bank's growth forecasts were too optimistic, saying there was a "significant chance on the economy contracting over a four-quarter period".
The BoE has forecast growth of 2.8 per cent in 2011 and 3.2 per cent in 2012, but Weale said: "I think it would be foolish to say that there's no risk (of a return to recession]."
Britain emerged from an 18-month recession at the end of 2009 and has surprised with robust growth since. However, tight credit, government spending cuts and weak consumer confidence have been cited as serious risks to the recovery.
Economic fears were compounded when figures released by the National Association of Realtors reported an unprecedented drop in sales of previously occupied homes in the US. Total sales for July were down 27.2 per cent to 3.83 million, far below the predicted 4.6 million and the lowest since May 1995. June sales were revised down to a 5.26 million from a previously reported 5.37 million.
The dismal housing data, coupled with Weale's comments, hit world stock markets. The London market closed 79 points down or 1.5 per cent just below 5,156. As the FTSE 100 closed, Wall Street's Dow Jones Industrial Average and the Nasdaq Composite were both down just under 1 per cent, while the Standard & Poor's 500 had shed more than 1 per cent.
Risk aversion saw gold rally nearly 1 per cent and ten-year British government bond yields dropped to near record lows, as investors sought refuge in "safe haven" asset classes. Bond yields move inversely to prices.
Meanwhile, oil prices slipped for the fifth day running, falling below $72 a barrel, amid gloom about the ability of world's top consumer, the US, to work through record stocks. US crude prices hit as low as $71.45 - the lowest level since early July.
The surprisingly weak US home sales data came a day after figures showed the revival in the Scottish housing market had ground to a halt, fuelling fears that Scotland could be sliding back into recession. The quarterly Lloyds TSB Scotland House Price Monitor showed that the average house dropped in price by almost 3 per cent in the three months to 31 July.
Michelle Meyer, senior US economist at Bank of America Merrill Lynch in New York, said the US data was "worrisome". "While it reflects the volatility caused by the end of the (government home-buyer)] tax credits, it also indicates a deterioration in the underlying trend for housing demand," she said. "The dangerous link to housing is home prices and this report signifies that home prices should fall considerably faster, which could tip the economy back into a recession.."
The report was released as Chicago Federal Reserve president Charles Evans warned that the risk of a double-dip recession across the Atlantic was higher than six months ago although he did not think output would contract, describing the recovery as ongoing but modest.