US v UK Economy – No Real Match!

Posted on 9 Nov 2009 by The Manufacturer

Howard Wheeldon - US clouds are clearing but UK skies are dark...

Contrast the better-than-expected fall in US jobless claims to 512,000 last week with increasingly miserable news about the UK economy which show that, despite September factory output rising a touch, total Q3 industrial production fell at a rate of 0.8% – worse than the 0.5% decline seen in the second quarter of this year. Granted, the US jobless figure is still very high and there are few signs yet that employers are even thinking about creating new jobs. And, while the jobless numbers trend continues to decline, we note that the most recent figure only equates to levels witnessed in March this year. The point though is that despite understandable concerns on what might happen when the era of US government stimulus is finally reversed and when the fiscal benefits enjoyed by US citizens this past couple of years come to a natural end, those that still have a job and house in the US face a situation which looks a lot better than it did a year or more ago. In the meantime no-one is about to close their eyes to natural concerns in the US that at some point next year the FED will be forced to begin tightening. But despite ignoring huge budget deficits and a massive national debt problem of its own, the problems facing the US appear far more manageable than those that face the UK. The bottom line is that despite deep seated concerns over the direction of US economy momentum in 2010 and beyond there does now appear to be sufficient confidence around on the Street to believe that even if better housing markets and improved industrial production stalls, chances are that the US economy will unlikely move back into reverse.

Back at the ramshackle UK ranch the MPC decision to hold rates at 0.5% again was hardly surprising. Neither, was the majority of economists, analysts and traders, did the decision by the MPC to raise the Quantitative Easing (QE) programme by an extra £25bn taking the total amount authorised to £200bn, although it clearly did disappoint a handful that had expected a £50bn rise. Patience is of course always rewarded in the end, and we are left to assume that we won’t be saying goodbye to the QE programme for some considerable time yet. If not before, this will be clear when sickly Q4 GDP figures are confirmed in late January, likely showing that although the UK economy might just about have escaped recession in Q4 for the first time in six individual quarters, the economic outlook for 2010 remains poor.

Unlike some economists, commentators and Labour politicians, we do not believe that mixed messages from some UK data last week such as CIPS reasoned caution by the MPC and a decision to hold back making a much bolder move. Instead, we believe that this lower level was reasoned by inevitability within the MPC that yet another round of QE would be on the cards in two or three months’ time. However, we would question why the MPC has avoided any mention of some need to put greater pressure on banks to lend.

None of these separate issues can hide increasing concern that we all as individuals have over the lack of momentum and visibility that the UK economy is on the mend. We fret too that messages emanating from government suggesting that economic revival is around the corner are just plain wrong. Sadly, despite the temporary improvement in house prices that was clearly caused by raised demand in a low supply environment, it seems that the inability of industry, commerce and private individuals alike to obtain additional funding means there is little chance of seeing the magic wand of economic revival any time soon. Add in the worrisome burden of up to £1.5 trillion of debt and the drain of that cost on government it is not hard to envisage a situation next year with UK jobless totals continuing to rise month after month as public sector costs are hopefully slashed. This alone will not be enough though and we must all ready ourselves for not only a likely change in government (welcome though it probably will be) but subsequent big cuts in government programme spending while at the same time taxes must inevitability be raised. Still, even though consumer spending has been patchy of late, I suppose the good news is that it is still holding up better than many of us had expected. But we suspect that Christmas 2009 will turn out to be a year when consumers spend only what they deem absolutely necessary. None of these thoughts make a good recipe for economic revival.

Other factors – some that we also share with our US cousins – such as a weak currency will also have an increased bearing on the direction of the economy next year. 2009 has been yet another bad year for the pound sterling of course, with the currency being 10% down against the Euro since the end of last year. Given weak differential between exports and imports as the nation depends ever more heavily on imported goods, the potential rise in oil; energy; and commoditised goods prices reflecting increased global demand has potentially large implications for UK inflation. So, as I constantly keep warning, while the US still talks deflation – an equally horrible problem for a country of that size – over here in the UK alarm bells ring out warning of returning inflation…….

It is true, meanwhile, that both nations are suffering from the continuing shift of global economic power from West to East. That will likely continue for many years yet. Above all though this change that has in part been fuelled by the joint push that we both made for globalisation may be manageable to one nation – the US – but not quite so easily to the other. And there lies the problem for the UK. Unlike the US we are just not a ‘can do’ ‘will do’ nation and today, sadly, it is probably true to say that we have only a fraction of the entrepreneurial spirit and attitude we once had. Still, the good ship ‘Jam Tomorrow’ is at least above the water. Holed she may be but with the possibility that she heads into ‘blue waters’ next May, it is probably worth hanging on for an interesting ride.

By Howard Wheeldon, Senior Strategist at BGC Partners