01 - 05 - 09

Enough has been written about the budget to denude a tropical rain forest, but its importance to the economy cannot be underestimated.

Budgets threaten the environment!

Whether or not the measures introduced – together with increasing monetary liquidity – will be effective in shortening the impact of the recession will depend on a number of factors. What is certain is that the borrowing plans put in place will affect not just the next generation, but the one after that.

Unless government spending is radically cut, borrowing will continue spiralling until tax revenues recover. And this will not happen until the economy starts to pick up and more businesses generate revenue to be taxed on.

It is therefore worrying to read that claims of a cull within the Civil Service are very far from the truth. According to the Sunday Times (8/3/09) £882 million has been spent over the past four years making 15,000 civil servants redundant, while an extra 42,020 new permanent jobs have been created, with a wage bill of £1 billion. This cost does not include temporary and agency staff.
Until the performance of government ministers and Whitehall mandarins is measured on how well they control costs, as opposed to by how much they can grow their areas of control, we will never get state spending under control.

Economic growth
Gross Domestic Product (GDP) dropped -1.9% during the first quarter of this year, but sales only fell by -0.7%, according to the British Retail Consortium. This suggests that the cause was partly down to falling inventories (stocks held by manufacturers and wholesalers), which is the conclusion reached by the Bank of England Agents’ Summary for April. The result could be that the figures improve as businesses have to increase inventories in order to meet demand (the alternative is to import more, which we do not want) although some forecasters are still predicting a slowdown in consumer spending.

Reduced stock levels can depress GDP

The International Monetary Fund is projecting a -4.1% fall in GDP for 2009, while the Centre for Economics and Business Research Ltd suggests it could be -4.5% and the Confederation of British Industry is more optimistic at -3.9%. The Chancellor predicted a more optimistic -3.5% in his Budget speech, but then he also predicted -1.6% for the first quarter of this year just a few days before the actual figure (18% higher) was released.

There is a danger that the fall in GDP could result in the UK losing its AAA credit rating; were this to happen, it would make government borrowing more expensive, but this seems unlikely.

Economic outlook 
While it is always dangerous to ‘call’ the end of any trend, there are reasons to think that the prospects for recovery are not as bad as some people are predicting. Talk of “W” shaped recession, where growth starts to recover and then falls back again, before commencing its real upswing, may be pessimistic although the road to recovery will certainly not be smooth and we will be paying for the banking crisis for generations. Positive indicators already mentioned are the fact that inventories must start to recover if anticipated consumer demand is to be met. In addition, some of the steps taken to reverse the credit crunch finally appear to be taking (limited) effect with lending no longer in decline. To some extent, recovery will depend on what happens in the job market (see below).

No such thing as a straight line in economics

David Miles, who replaces Professor David (Danny) Blanchflower on the Monetary Policy Committee in June, says that a combination of tax cuts, large fiscal deficits, interest rate cuts and quantitative easing will, after a time lag, result in an end to recession. Let’s hope his predictions are as accurate as his predecessor’s appear to have been (albeit, he was largely ignored by his colleagues).

One saving factor for much of the world could be China which, although also experiencing economic slowdown, still grew by 6.3% during 1Q09 (down from 6.8% in 4Q08). China represents a massive market and consumer demand can be expected to grow there, as long as employment remains at relatively high levels, as workers seek to share in the fruits of their labour.

The UK is still a manufacturing nation and we should not forget – or allow the government to do anything that harms – this fact. In it lies the potential for an export driven recovery, assisted by a weak pound.

Markets (Data compiled by the Insurance Marketing Department Ltd.)
What a month that was for stock markets round the world. After a poorly received budget in the UK and fears of swine ‘flu temporarily knocking back investment markets, those we follow have all preformed remarkably well.

Even swine ‘flu has not depressed markets

The FTSE100 rose by 8.09% during April, with the mid-cap FTSE250 doing even better with a rise of 18.12%. Markets may still be down over twelve months, but at least these are encouraging signs. Few may wish to predict that this is necessarily the start of a sustained recovery – markets do not generally work like that – but this is reassuring because if investors were still very nervous about the economy, shares would be unlikely to perform so strongly, even over the longer term. Interestingly, reading daily reports over what is influencing market moves looks far more like a few years ago than the height of the credit crunch.

Elsewhere, the Dow Jones rose by 7.35% while the Nasdaq100 grew by 12.35%. The Eurostoxx50 also got into double figures for the month at 14.69%, while in Japan the Nikkei225 rose by 7.49%.

Sterling had a good month against the US dollar, rising by 3.46% to end at $1.48, while against the euro it grew 2.72% to end at €1.11. Again, these levels are significantly lower than a year ago (25% down in the case of the dollar). In many respects, this is not what we currently want to see. The weak pound is encouraging both inwards tourism and exports. We still have a significant manufacturing base, as Roger Bootle of Capital Economics points out in the Daily Telegraph (13/4/09), representing a 12% share of the economy. In fact output grew by 4.5% in the decade to December 2007 and, even thought many raw materials have to be imported, a weak pound helps when it comes to overall competitiveness abroad.

Oil prices rose by 3.15% tipping over US$50 per barrel for Brent crude 1-month futures for the first time in ages.

Shopping had a boost in December

Inflation
The latest inflation figures indicate that the Retail Prices Index has fallen over the past year by 0.38%, so it is just as well that the Chancellor has announced that state pensions will rise next year, even if the RPI is zero or below. However the more important Consumer Price Index rose by 2.91%, so (as any shopper can tell you) many household prices are still on the up.

VAT cut ‘worked’
Many commentators argued that a 2.5% cut in VAT last December would do absolutely nothing to boost consumer spending; it simply was not enough. It is therefore pleasing to report that we may have been wrong; there was a boost in retail sales in December.

Some feel that this could have been due to other factors including Christmas and general price cutting by retailers desperate for market share, but others say the result was not ‘artificial’ and now predict that the reversal scheduled for January 2010 will result in a fall in sales. We will have to wait and see.

Professionals have been hit this time

Jobs
There is no doubt that the recession is impacting on jobs and those most affected include professionals within the construction and supporting sectors such as architects and conveyancing lawyers. On the other hand, if we compare our employment position with other parts of Europe, data from the EU quoted in the Daily Mail (25/4/09) suggests that, with an unemployment rate of 6.7%, we are far better off than many other parts of Europe including Spain (17.4%), Ireland (11%), France (8.6%) and Germany (8.1%).

Per capita labour costs are reported in the Bank of England Agents’ Summary as lower than a year ago (the first negative score since 1998 when scoring began), but demand for labour continues to fall.

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