Economic commentary - Quarter 3 2009
We are once again in the midst of the political party conference season, with much focus on the economy and how the parties will tackle the massive public sector deficit going forward. Pressure is on the Conservatives to show that they have definite and coherent policies that will make them a viable alternative to the present government as opposed to the default option. We are hearing more on their strategy, but resolving public finances is obviously likely to be a long haul.
We are well entrenched in recession: the first two quarters of 2009 showed negative figures for gross domestic product, with the second quarter figure being revised to -0.6%. However, speculation has been increasing of late that we are now on the verge of emerging from recession: there is clear evidence from the latest industrial trends survey undertaken by the CBI that we are not only seeing an easing in de-stocking, but also a pick up in demand. Indeed, both industrial production and manufacturing output figures were positive again in July (0.5% and 0.9% respectively) fuelling the belief that we have already left recession behind. This is reinforced by the strong recovery in the all-important services sector, which grew at its fastest pace for almost two years in August. Even housing is showing signs of stabilisation.
Much future momentum, however, rests on the shoulders of the consumer. There is slightly conflicting information regarding retail sales: the last official statistics appeared to indicate that spending lost momentum in August, after two strong months, with total sales volumes being flat and there is also evidence that consumers remain cautious about spending. The latest CBI distributive trades survey, on the other hand, showed stability returning to the high street with a particularly good month in September. On a less positive note, unemployment continues to rise, reaching almost 2.5 million in the three months to July, the highest level since 1995. Overall, unemployment now stands at 7.9%, which, although high is notably lower than the US (9.7%) and Europe (9%). Lending continues to be somewhat muted; in particular lending to businesses declined sharply in recent months and households appear to be developing a greater sense of caution, with the savings ratio rising to 5.6%, its highest level for more than five years.
Inflation, the central policy issue for so long remains very subdued: the consumer price index rose by a modest 1.6% in August (up 1.8% in July) and the old measure of the retail prices index showed a fall of 1.3% in August (-1.4% in July). There are very few inflationary pressures and indeed it seems unlikely that we will see any re-emergence in the short term as both producer prices and average earnings remain very subdued. Attention, particularly in the political arena, remains firmly fixed on the state of public sector finances. In August we saw a deficit of £16.9 billion, bringing the total for the first five months of the fiscal year to £65 billion. Thus it should come as no surprise that we are likely to see substantial fiscal tightening as well as a severe squeeze in public spending. At present we are on track to overshoot the government’s target for annual public sector expenditure that was revealed in the last budget. It is clear that whatever the outcome of the next General Election, stringent measures will be required to bring these finances under control again. There have been warnings from both the CBI and the Chamber of Commerce that prospects for recovery and future growth may be weaker than hoped and much depends on consumer spending, investment and net exports. In addition sterling has weakened considerably, after the Bank of England report warned that the financial crisis may have prompted a reassessment of the value of the pound.
On the overseas stage, the UK does not compare particularly well. Both France and Germany saw a return to growth in the second quarter, whereas the US is seeing a somewhat mixed picture in terms of statistics, but is without doubt further along in the economic cycle. Finally, we have seen Australia raise interest rates in the last few days, indicative of their strong emergence from recession and speculation that countries such as Korea in the Far East will follow suit.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority.