The recession is over – but for how long?
By
Dominic Frisby Jan 27, 2010
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We've not seen the end of long dole queues
The good news yesterday was, of course, that we are no longer in recession, according to figures from the Office of National Statistics.
The bad news is that growth in the fourth quarter, at just 0.1%, was so paltry and came so late (the US, France and Germany all came out of recession last summer) that really we have very little to celebrate.
More importantly, the question on everyone's lips now is: "Is that really the end of the recession or is there more to come?"
This is hardly a 'feel-good' recovery
I like radio phone-in shows. They give you a feel for public sentiment. I was listening to a lot of them yesterday, both on BBC Radio 5 and BBC London. The end of the recession was of course the big topic. There seemed to be an endless stream of calls from people who had lost their jobs last year and were now finding it very hard to land another one. The recession isn't over for them.
The general feeling was one of belt-tightening – which is no bad thing – and of people cutting costs where they can, paying down debt and so on. But many are desperately struggling to make ends meet, even in this low-rate environment. It still amazes me how much debt people manage to get themselves into.
So it's hardly a 'feel-good' recovery. And what's truly astonishing is the lengths to which the government has had to go to achieve even this pitiful growth. Among other things, VAT was cut; interest rates were slashed to their lowest levels in history; an unprecedented car scrappage scheme was introduced; and quantitative easing to the tune of £200bn was pumped into the system.
Here's why things are going to get a lot worse
I can't help but think that things are going to get a lot worse. In many cases, the general moaning about tough times is going to turn to anger and tears. I don't see this recession as over. In fact, a great many previously postponed problems are now looming. What is going to get us out of all this?
Thanks, in part, to our weakening currency, inflation has proved higher than anticipated – up from 1.9% in November to 2.9% in December. At the moment it's not a vast problem, but it could quickly become one. If sterling weakens further – as I believe it will – then rates may well have to rise. The effects of rising interest rates, be it on our housing market or our other debt costs, do not bear thinking about.
Sterling has been falling against the euro since early 2007. It has been below €1.30 since early 2008. So manufacturing has already been enjoying the benefits of a weaker currency against our main trading partner, the eurozone, for a considerable period of time. Yet it shows no significant signs of leading us out of recession.
I'm not sure how great a benefit the 2.5% cut in VAT brought to our economy. But any benefit it did bring is now over, as VAT has returned to 17.5%. The car scrappage scheme is scheduled to end in February. It's not altogether clear of how much benefit the £200bn quantitative easing programme was either. But again, with inflation a concern, it will be hard for the Bank of England to justify printing much more money, so any benefit it did bring will soon be reversed.
Government-spending was another of the main drivers of growth in the fourth quarter. But that can't continue either. Both sides of the Commons have effectively admitted that prudence must return and spending be reined in. Moreover, the unemployment numbers do not look good at all (What's good about the employment data?) – and they'd look a lot worse if they weren't so skewed (but that's an argument for another day).
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What about the City? It was the main driver of the boom years. Can it come back to lead the economy again? I doubt it. Regulation – or lack of it – has been blamed for the financial crisis. If the radio phone-ins I listened to are anything to go by, this explanation is widely accepted. (I happen to think the opposite – that many of today's problems lie in interventionism – but again, that's for another day).
In any case, politicians are threatening tighter regulation of the banking sector and the public seem to be clamouring for it. But be careful what you wish for. Look at what Barack Obama's threats did to the stock markets last week. They lost about 5% in three days. At one stage it felt like autumn 2008 all over again.
Now there's no doubt that the banking system needs reform. And it's interesting that Obama won Mervyn King's support for putting 'radical reform' of the banking system on the international agenda. Perhaps we do need a return of some sort of Glass-Steagall Act, which will separate investment from commercial banking. Or perhaps we need to reform the monetary system altogether. But while that could be good in the long term, the impact of tighter regulation and reform could be devastating to stock markets - which already appear to be rolling over.
The least we can expect is a double-dip
In short, I can't see a route out of all this without taking more pain first. Looking at the following chart which shows GDP growth since 1955, you can see that growth during recessionary periods frequently rebounds, only to decline again (look at the spikes and slumps in the mid-1970s and early 1980s).
[click on the chart for a larger version]
Given the magnitude of this recession, and its underlying and still unsolved problems, I think the least we can expect is a double-dip.
What effect can one man have on a stock market?
Finally, as a sidenote, I'd like to show you the effect that one man can have on the entire market – particularly when investors have the jitters. Robert Prechter is an American author and stock market analyst, who uses 'Elliot Waves' – wave patterns in stock charts – to make financial forecasts. Notoriously bearish, he has made some great stock market calls – including the crash of 2008 and the 2009 rebound – as well as some woeful ones, (particularly his bearish calls on gold). He has turned very bearish on the markets (as have I by the way) and advised his clients two weeks ago to go 200% short. Yesterday he appeared on CNBC at 3pm expounding his bearish outlook. Look at what happened to the S&P500 next:
[click on the chart for a larger version]
It may just be coincidence of course...
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by
Dominic Frisby
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