Friday, 14 August 2009

Where now for the UK Economy?

Where now for the UK Economy?

With France and Germany now officially ‘out of recession’, at least technically, where does that leave the UK? “Better placed to weather a recession than any of our rivals” was the proud claim that Mr Brown felt appropriate some time ago. While there might have been a degree of reason for making such a statement at that time, the passage of the intervening months has not been so kind to us.

* In the second quarter of 2009 the French & German economies both grew by 0.3%.
* During the same period, that of the UK shrank by a further 0.8%.

It is likely that this is in large part a result of the reliance in our economy and particularly London’s on Financial Services as a significant driver of the growth that we experienced during those ‘good times’. With the ever more exotic means that were employed to make money in Banking and its associated areas, the growth curve became ever steeper, leading to the inevitable reversal being steeper and deeper than it otherwise might have been. Indeed, it was one of our banks who rushed to take on the ailing ABN Ambro, thus importing the risk of their failure to the UK. Thus, our European friends can now be seen to be leading us by more than a short head in the crawl back to prosperity.

So is this the way it is going to be?

Well, for the short term I would say probably yes. In the longer term there are some positive signs within the generally depressed mess that we call a home economy. Mortgage Approvals rose for the fifth consecutive month in June. This is a measure of the new lending that has been approved in the retail housing market. If we care to look back over previous economic cycles, it is this measure that nearly always falls as a precursor to a down-turn and equally clearly the one that signals a positive direction change on the way out of the doldrums. Typically we could expect the upturn in mortgage approvals to precede any recovery by six to twelve months, as has been the case in the past.


However, that is not the whole story. Sadly we will still have the unhappy tail of rising unemployment to contend with for some months to come. Again, it invariably happens that the capacity that is being shed within the economy continues to be lost even past the point where technically things are beginning to improve, and as a result I believe we can expect unemployment to continue rising, probably past the end of 2009 and into 2010. Of course the numbers we see published are just data, but beneath each job lost lies a personal tragedy, with fall-out that has implications far beyond that poor person’s immediate financial situation – the holiday that they were going to book but now can’t afford, the new car they now won’t be ordering or the home improvement plans that are now on hold – all of which means money that is effectively being taken out of the pockets of all of the professionals with whom they could be doing business. This is why the true financial cost of unemployment is so difficult to assess, and that is before we even attempt to put a value on the ‘tried and failed’ state of mind it can so often engender. Unemployment is therefore going to be a continuing theme going forward.

Flogging a dead horse?

Another uncomfortable theme will be the effects of taxation. In its blind panic to right the Banking sector, the UK Government has signed us all up for more borrowing than we have ever embarked upon before. Whether or not that was the right thing to do is almost not the issue. What is far more pertinent is that the borrowing has to be both serviced and repaid, something which requires a significant amount of cash on an ongoing basis. The Government is pretty limited as to where this can come from, with the main and most obvious target being revenue it can extract from the general economy. Whether we call it Insurance Premium Taxation, Airport Tax, Parking Charges, Speed Camera Fines or indeed if we are honest and call it good old fashioned Income Tax, we still need a lot of it in order to come anywhere close to that which is needed to service this increased borrowing. As a result there is a very real danger that we might snuff out whatever spark of recovery does exist within the economy currently and prolong the pain. Don’t forget, recessions are not a good time to be putting up the cost of employing staff, the cost of using Public Services, the cost of working, and yet that is the very real situation faced by our leaders as a result of the massive debts we have run up.

This I think is the most destructive influence into the medium term – the fact that the almost insatiable need for cash to service our borrowing may fix us in the rut that we currently trudge for far longer than would have been the case if we were just in a ‘normal’ recession. Time will tell.

Why are Bank profits actually a good thing?

I will end my first blog on a contrary but positive note. There has been much vilification of Banks and Mortgage Lenders recently, and I am not about to spring to their defence. It is true that with still very limited amounts of money being lent relative to the excesses of the past and even that which is available, lenders are making significantly higher margins than they were before. All of this is indeed a rather unpleasant truth when so many people are struggling to pay their mortgages each month. However, ironically it may turn out to be our best hope of a faster exit from the problem I have highlighted above. The Chancellor’s Budget was based upon economic projections that I think will come to be seen at best as naively optimistic, but I suspect that his predictions for the Banking sector might have been overly subdued, in line with the ‘Meltdown & Armageddon’ generally being pushed by our various media. If, as I suspect, the Banks turn out to be making far more money out of us currently than was predicted, then there is a chance that we might actually be able to see returned some of the borrowed Public Money that we advanced them, sooner and in larger amounts than we had expected. This might in turn relieve the pressure on the Public Purse, since it would mean that we were able to repay some of our borrowings without the potentially crippling taxation that would normally be required to do so. Again, time will tell on this one too.

Sam Lever is an Independent Financial Adviser. His blogs are an expression of personal views and nothing more. For Independent Financial Advice in Buckingham and the surrounding area give Sam a call. Please see the website link (top right) for contact details.