UK’s economic outlook reveals unsightly view

Philip Salter
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ACCOUNTANCY firm BDO joins an ever-growing group warning that the UK’s economy is on the cusp of recession. In its latest business trends report, optimism levels came in below the crucial 95.0, for the first time since July 2009, for both the manufacturing and services sectors.

BDO partner Peter Hemington says: “Businesses’ hiring intentions point to more job losses ahead which, coupled with tumbling optimism and output, indicates tough times in early 2012.” He adds: “Given that the latest ONS growth figures have been revised downwards, this concern is even more acute.” Hemington calls for supply side reforms – particularly reform of the tax system – to introduce measures encouraging private sector investment.

The UK is a largely powerless spectator in the unremitting Eurozone crisis, with many fearing its impact. The National Institute of Economic and Social Research is the latest to weigh in on the issue, suggesting that there is a 70 per cent chance of the UK heading into recession unless the crisis is resolved, and 50 per cent even if it is. The think tank also predicts that growth won’t return to pre-recession peak before 2014.

Not everyone is bunkering down. Against the consensus view that a collapse in the euro would be a disaster for the UK, economists at the Centre for Economics and Business Research (CEBR) think the end of the euro would “not be anything like the disaster that has been argued”. If the currency’s decline were undertaken in a proactive and orderly way CEBR’s bold claim might be true – but this is highly unlikely given the ineptitude Europe’s politicians have displayed to date.

Either way, one thing’s for sure – traders like volatility and we are certainly in for a lot of that over the coming months.

The UK economy may have grown by 0.5 per cent in the third quarter, but this is not exactly cause for celebration. The medium-term outlook remains fairly bleak, as growth remains decidedly anaemic. Not only this, but the travails of our Eurozone partners threatens to sweep away even this small amount of progress.

With the Bank of England firing up the printing presses once again, the prospects for sterling-dollar look bleak indeed. Our own pound might gain simply from being an alternative to the beleaguered euro, but yet more money printing from Sir Mervyn and his band is not exactly conducive to the health of the currency.

In addition, UK consumers are still recovering from their debt hangover, as the after-effects of years of excessive spending continue to be felt. Retailers have been hit hard, as the great British public errs on the side of caution. Any glance at the share price of companies like Mothercare, Carpetright or HMV will confirm that this sector is facing a hard time. However, one company that has weathered the storm so far is Next, whose shares are up nearly 40 per cent since the start of the year, compared to a drop of 7 per cent for the FTSE 100. Outside of the high street, northern supermarket Morrisons might also be a possibility, as consumers trade down to cheaper products, abandoning the hallowed halls of M&S and Waitrose for low-cost alternatives.

In these difficult times, we can only hope that our eminent chancellor has some fairly inventive ideas up his sleeve.

The UK economy expanded more than was expected in the third quarter, which was welcome news for many, in particular the UK chancellor. But we can’t get too excited, as it simply represents a bounce from the Japanese earthquake and multiple bank holidays earlier in the year. This growth is not expected to be maintained into the next quarter and 2012. It will also be particularly difficult to see the economy grow this winter, if we see anything like the disruption we’ve seen in the past two years caused by terrible weather conditions.

Confidence for both businesses and consumers is downbeat with lots of well-respected think tanks saying that the likelihood of a double dip recession has increased.

Businesses are still very worried about the outlook for growth and as a result they don’t want to invest or employ new staff. As a result, unemployment looks like it will remain high for some time and even the City is not immune to the downturn, with redundancies increasing and job vacancies falling, putting further pressure on the wider economy and in particular the government’s coffers.

The woes for the struggling UK economy are not all down to government spending cuts, but a general slowdown across Europe and the globe as a whole. Our biggest trading partners across the English Channel are in trouble and it is having a knock on effect for us.

Unfortunately, the future for the UK economy looks bleak and for those political followers out there we can expect more of the shadow vhancellor’s impersonation of a cricket umpire signalling four runs across the despatch box.


2012 is still being billed as the magic year for the UK economy. For a long time we have been told that inflation would start to fall, growth would pick up and unemployment (the most important barometer) would turn the corner at the start of the Olympic year. However, that was before the Eurozone problems intensified. I think one thing that we can count on is inflation taking a sharp turn lower. It is expected to fall sharply in the first half of 2012 and gradually continue towards the benchmark 2 per cent, if not a tad below.

The big issue, and a long term question for many economies is whether or not we will get any more quantitative easing (QE). Over the last month we have seen the Bank of England (BoE) expand its bond buying programme, and many expect to see another shot in the arm in the first quarter and maybe even more in second of 2012.

The recent minutes from October’s Monetary Policy Committee meeting showed yet more concern over the state of the economy in the UK and this could be set to continue. The November meeting, although unlikely to see any more QE or a movement in rates, will have the BoE growth and inflation forecasts to dissect. With a plethora of poor economic data released in the last few weeks and the worsening crisis in the Eurozone there is still likely to be a lot to discuss.

All in all, the UK economy will be on high alert as we approach the festive period. The inflation report on 16 November will be the biggest indication as to where we are headed, but with QE back on the table, recent poor economic data and the fear of Eurozone contagion, we look set for at least another quarter of uncertainty in both the markets and the economy.

The UK has been something of a wall flower of late as the Eurozone has taken the spotlight. But while Greece has imploded and Italy is next in the firing line, the UK has managed to make itself and its own debt problem fade to the background.

UK gilt yields have sunk as Italian yields have surged and the UK credit market is becoming a bit of a safe haven. The yield on the 10-year bond is currently 2.3 per cent, a level Rome can only dream about. Two-year yields are a ridiculously low 0.5 per cent.

The UK had a budget deficit last year of 10.5 per cent of GDP; however, although its budget gap may be more like levels in Greece, its borrowing costs are more like Germany’s.

So why this discrepancy? The markets like certainty and that is what the UK government gave them. The UK identified its debt problem fairly early on and the coalition has implemented an austerity plan. This is something Greece and Italy have struggled with. Weak growth may mean that the UK misses its fiscal targets, but the markets don’t seem to mind. The UK at least has a plan and that is providing certainty to the market.

The credit market may be booming, but the pound and the FTSE are a different story. The UK’s equity index is mostly made up of foreign corporates with global reach. Since the Eurozone debt crisis threatens to cause a slowdown in the world economy, the fortunes of the FTSE 100 lie with Europe and the UK’s equity index is at risk from changes in risk appetite.

The pound is also struggling under the weight of weak growth and general risk aversion. However, the more the debt crisis threatens Italy the worse it is for euro-sterling.
A break below £0.8550 would open the way for further losses in the single currency.

While the latest GDP figures, which showed that the UK grew at a rate of 0.5 per cent in the third quarter, higher than earlier estimates, are certainly positive, it is nothing to get overly optimistic about.

The UK economy is still at significant risk of at least one quarter of negative growth, particularly should the Eurozone succumb to its sovereign debt crisis, a prospect that is fast gathering pace with Italian 10-year bond yields hitting a new euro era high yesterday.

Germany and France are among the UK’s top trading partners in the world and so a weak Eurozone that impacts these two nations is bad for UK growth and there is every chance that the Eurozone is heading back into a recession. An admission by new European Central Bank (ECB) president Mario Draghi last week emphasised this point. What’s more, once you strip out exceptional one off items from the latest “initial” GDP reading too, it looks far less rosy than from the outset, if 0.5 per cent growth can look rosy in the first place.

A separate PMI reading also saw the manufacturing sector fall at its fastest rate in two years to read at 47.4, below the 50.0 growth level. This is evidence that the UK economy is struggling and could dip back into recession soon if the drop becomes a trend.

While the move by the Bank of England to increase its asset purchases is a move designed to reignite the faltering UK economy, the current size of the increase, £75bn, is unlikely to do much in the near term and we are also expected to see this size remain unchanged when the Monetary Policy Committee meets later this week. The UK economy remains teetering on the edge of recession.