Recession over yet?

Posted on 24 Aug 2009 by The Manufacturer

"...don’t rule out the awful prospect of a UK double dip," says Howard Wheeldon.

The rise in the quarterly Institute of Chartered Accountants Index of Business Confidence from a miserable -28.2 in March to +4.8 at the end of June is a welcome indication that ICA members do now believe that the recession corner has been turned. I hope they are right. But while the survey talks of an end to recession, with recovery on the minds of members, it rightly warns against complacency. The challenges ahead for businesses should not be underestimated, it says. Such warnings can hardly be argued and they apply not only to ICA members and those businesses that they serve, but equally to consumers and those within the British Government that might wish to believe the recession battle has finally been won.

The ICA survey is probably a fair assessment in my view of just about where we are in terms of the economy. The question though is whether this might be close to the best it will get. It is certainly right that there should be a better feel-good factor emerging from consumer and business alike. And to a point it is justified. Let me digress for a moment and give a small personal example from yesterday. With the new school term fast approaching, on my return from a pleasant weekend in the Midlands I had the misfortune of being arm twisted by my family to spend slightly longer than I might have wished at the sizable yet well organised Bicester Village shopping complex. Actually this was a quite pleasant experience even though it was to say the least heaving. The point though is that people were genuinely spending and the shop tills were doing great business.

So, right now there is no denying that news flow seems pretty good. It is after all still August and half banking, investment, currency and commodity markets appear to be away on vacation with the rest content to play follow my leader – meaning if the US market looks as if it is going to go up then ours will simply follow suit. In my commentary piece last Monday and in no less than three papers published the previous week I hope that I provided ample enough warning of my personal view that stock markets might in September take a somewhat different perspective to the outlook that they have through August. We will see. Meanwhile given that Japan and China, Germany and France are relatively free to move forward into resumption of real growth without being burdened by massive amounts of national debt, it will of course be interesting to observe, though they might just move forward at a very different pace to the UK. I am not deliberately attempting to ignore the US debt burden here but whilst accepting the burden of US deficit remains a huge concern that is yet to be sufficiently addressed perhaps I take the view that the world has somehow always come to terms with living with US debt. How long it will do that for does remain a very huge concern but it is one to cover separately.

We like others have warned for several months that the rapid rise in UK national debt would have serious ramifications for UK economic recovery. Neither would many of us who have been walking around with our eyes open over the last year have been that surprised with news last week that government revenues collapsed so much in July that the government was forced to effectively borrow £8bn in a month which is normally one of bumper net receipts. Bad enough that the current level of UK national debt is £800bn, representing 57% of GDP, but the knowledge that before this peaks – maybe by 2013/4 – it could well reach £1.6 trillion is something that bulls of recovery would do as well not to ignore. Whatever, it is going to affect the UK economy in some way or another for probably a generation, and in terms of rising taxation and lower public spend all UK citizens for as long as the next 15 years.

It is of course not that long ago [November 2008] that Chancellor Darling said that UK borrowings would peak at £110bn in the current financial year. Not surprisingly some months later the government formally upwardly revised the borrowing requirement figure to £175bn. Today we may be talking of a 2009/10 borrowing requirement this year as high as plus £200bn with a similar level required next year. We might also take note that the figures above do not include contingent liabilities of recent UK bank nationalisations, pensions or public private partnerships although I might add that some suggestions related to this are grossly overdone. Whatever, it looks to me as if government debt will peak at a figure likely above 85% GDP.

Assuming David Cameron wins the next election – due sometime before Spring is officially over next year – we assume that the Tories will quickly batten down the hatches of government expenditure and begin to raise appropriate taxes. At what level such measures will act to slow the economy is at this stage impossible to say but it would be wrong to kid ourselves that there will not be an adverse affect on the economy through cutting public expenditure and raising taxation. For now we are all left to scratch our heads as to what the Tories might actually do.
What we do know though is that even if they have yet to make the necessary individual policy decisions of how they will wield the axe they do at least appear to have some kind of strategy.

Whilst formulating a view of the economic outlook for the US, Japan and China in 2010 is far from easy at this particularly crucial stage, as they all turn from either slow down and recession to recovery or growth, I am left to conclude that this is nothing compared to the difficulty providing any form of positive view for the UK economy – beyond of course a small visible pick up in consumer and business confidence that may only be temporary. Whilst I may still fear that economic stagnation is a problem that many western nations might face in the years ahead I am at least content to believe that there is some justification that the US, Japan, China and others have now turned the corner and that a period of better times do lie ahead – albeit maybe for only for a relatively short period.

But despite some minimal signs of improvement in certain parts of the UK economy as what few factories we have left restart production for a while and despite government politicians talking the economy up, a more positive outlook for the UK economy is not one that I can share. It gives me no pleasure in saying it but as far as I am concerned the UK is merely riding on the coattails of better news on the wider international economic front. Jobs are still being lost and as yet I see no sign whatsoever of any new jobs being created. In the UK I do not expect that position to change. Indeed, without sufficient and meaningful industry to make any seeming international economic improvement work for us with increased exports or to take advantage of a currency that even though appearing to defy gravity is still low enough to allow the UK to compete well against other westerns nations, I am bound to wonder how the government will raise sufficient tax revenue to begin the very long pay back phase needed to reduce the national debt. We forget at our peril that just paying for UK government debt each year accounts for the fourth largest slice of the government spending cake, behind health, education and welfare. No room for cuts here. Indeed, with interest rates likely rising a year from now, it may well be right to build in a further increase in debt costs.

For now though, Messrs Brown and Darling and indeed the rest of us should enjoy the brief respite from two years of almost incessant bad news. It is true that the picture does look just a touch better than it did and I doubt that it will return to anything like the depths of despair seen in late 2008 early 2009. But, stagnation worries aside, while looking forward to further signs of improvement across the globe may well be right don’t rule out the awful prospect of a UK recession double dip.

Howard Wheeldon is the Senior Strategist at BGC Partners.

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