Economic review of March 2008

Bad news sells papers, so it is hardly surprising that some commentators are predicting doom and gloom. For example, one Investment Bank is predicting that we face a 35% chance of recession; but one has to ask whether they are just seeking publicity, or are trying to influence the Bank of England’s Monetary Policy Committee further to reduce interest rates when very real fear of inflation would make such a move questionable.

The reality

In fact, there is no clear indication that we will actually go into recession, although a continued slowdown in growth remains a probability. Those looking to the Great Depression and claiming that current problems in the US make it inevitable that the UK will be harder hit should look at the data. Between 1929 and 1932, the US economy shrank by about a third; during the same period, the UK economy shrank by just 5% and then grew steadily up to the war. Equally, neither the shocks of 1998 nor September 11th 2001 resulted in any long term damage to the UK economy.

DGP is expected to grow by 0.4% to 0.5% in the first quarter of 2008 and while this is down on the last quarter of 2007, it still represents the 65th consecutive growth period. In other words the economy has grown continuously since the start of 1992 – five years before Gordon Brown became Chancellor.

Employment is still strong, which is a positive indicator because the last time we had a recession employment started to decline first.

The US Federal Reserve’s decision to cut base rates yet again gives the lie to our previous comment that the last massive cut was a “one-shot cannon”.

However, the fact remains that this gives the US central bank very little scope for further movements, if it does not wish to emit an increasing air of panic. Conversely, some commentators saw it as a sign of economic confidence that the ‘Fed’ did not cut rates by a full 1%.

Canadian rates have been reduced by 0.5%, but few others have moved recently.

As suggested above, inflation remains a very real spectre at the feast and one that nobody on a fixed income, such as many pensioners, can face with equanimity. The fact that rising prices affect everyone is perhaps best exemplified by a rapid decline in the savings rate (which is now just 2.9% of income including pensions) and the fact that personal indebtedness continues to rise. According to Credit Action, personal debt in the UK grows by £1 million every five minutes and we now owe £1,214 billion – 9% more than this time last year. Anecdotal evidence suggests that debt is rising fast amongst pensioners.

Markets (Data compiled by the Insurance Marketing Department Ltd.)

Stockmarkets generally followed a similar pattern throughout March, dipping to a low point before recovering slightly. The FTSE100 ended the month -3.1% down at just above 5,702 after having sunk to 5,414 at one point; however the FTSE250 fared better, losing only -1.6% during the month, although at one point it had been almost 7% down. Ongoing worst performer has been the AIM market, which lost some -6.26% last month to give a dismal 12 month fall of more than 16%.

In the US, the Dow Jones fell only by -0.03% while the Nasdaq100 returned a positive -0.34%. However, in the longer term, the Dow Jones is less than 1% down over 12 months, whereas the Nasdaq100 is almost 6% weaker. The Eurostoxx50 fell -2.24% during March to make it almost 13% lower over a year, while the Nikkei225 reversed its February recovery to end -7.92% down, meaning that it has lost more than a quarter of its value during the last year.

With interest rates much higher in the UK than many other territories, it is perhaps surprising that the pound is still losing ground, having fallen -0.47% against the dollar and -3.55% against the euro. The inference to be drawn from this (because cash usually flows into currencies with higher comparative interest rates, pushing their value up) is that a cut in interest rates could force sterling even lower. This would help exporting manufacturers (see Ta-Ta to Jaguar and Land Rover, below).

Rather closer to home for motorists, the price of oil rose only slightly during March, with Brent Crude 1-month futures rising by just -1.6% to end at US$101.30, although the price had topped more than US$105 per barrel during the month. This must raise the question why fuel prices at the pumps appear still to be rising. Surely this could not be profiteering by the oil companies!

Predictably, the price of gold, which had reached US$1,000 during March, ended the month -6.63% down at US$907.82, which is still about a third higher than this time last year.

The Budget

You have probably read enough about the budget to last a lifetime – well, at least until next year – but it is worth noting that while most families may be marginally better or worse off overall, the slowdown in economic growth has apparently left Mr Darling with the need to increase borrowing for 2008/9 by some £20 billion.

The jury is out on whether Ed Balls (Children’s Minister), on hearing David Cameron complaining that we now have the heaviest tax burden in history actually said “So what?” (as heard by many listeners) or “So weak!” as recorded in Hansard, after Mr Balls had had the opportunity to “set the record straight” with the reporters.

Ta-Ta to Jaguar and Land Rover

Sorry about that, we simply couldn’t help ourselves. The purchase from a troubled Ford of these iconic British marques by the Indian conglomerate Tata is seen by many as a vote of confidence in the UK. If, as seems likely, manufacturing remains in the UK, this will be a boost to a sector that has been languishing for many decades.

But while we may welcome increasing globalisation, there is an undercurrent of concern that the UK manufacturing sector continues to decline. Since 1997, UK manufacturing has grown by 2.8%. Not a year, but in total. Manufacturing’s share of GDP has fallen from 21.1% in 1996 to 13.2% last year. During the same period, financial services’ share of GDP has risen from 6.6% to 9.4%. It must be asked (even by those within the financials services sector) whether this is good for the economy as a whole.

The government has tried to be friendly to the city and has, at least until recently, managed to create an environment in which it can grow in stature as a world centre. For this it must be applauded; but at the same time, it has presided over a shocking fall in the fortunes of what was the powerhouse of growth throughout the nineteenth and much of the twentieth centuries; manufacturing. The fact that labour and other resources are cheaper elsewhere should not be allowed to narrow the economic base of this country. Innovation and increased productivity should be encouraged just as much as the new ‘green awareness’.

Credit

There is no doubt that money is getting tight in some areas – even ‘top quality’ borrowers have recently been receiving letters from banks notifying them of increased interest rates because of “current market conditions”. But this is not reflected in the economy as a whole, where M4 (the broadest measure of money supply) has grown by 12% over a year ago. Nevertheless, the Bank of England has rightly taken steps to ensure that banks have access to extended lines of credit, to see them over a difficult period. The government should, however, be prepared to watch for profiteering carefully and to penalise banks who unnecessarily overcharge customers.

Banks are understandably concerned after Bear Stearns got into trouble late in the month; its share price falling from US$157 at one point during last April to US$10.78 on 28th March. As with Northern Rock, this appears to be largely the result of a rush to extract deposits by savers; had everyone held their nerve, the bank might have survived - albeit with reduced profits for a year or so.

Unfortunately credit rating agencies failed to react to the life-raft offered to the Bank by the Federal Reserve and downgraded its rating to ‘non-investment grade status’. As a direct result other banks would no longer trade with it and its fall was unavoidable. This should act as a warning to other banks; liquidity, not assets is what matters.

Immigraton

It has long been said by some that immigration (of the right sort) is a benefit to the UK. After all, we have been accepting people from overseas throughout our entire island history. New research by recruitment agency Harvey Nash suggests that we can expect to have 800,000 skilled immigrants in the workforce by 2012 and that they will contribute £77 billion to the economy. Conversely, a House of Lords committee has just come out saying that there is no economic benefit at all.

Anecdotal evidence that many workers decided not to come back after Christmas due to the weakening economy, may or may not represent a hiccup; but the debate will rumble on.

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