Friday, October 23, 2009

The Recession Is Not Over, And I Don't Think It Will Be For Some Time Yet

I see in the news the announcement that the recession is not over. The surprise for me is that there is surprise at this particular announcement.

I am no economist, and every post when I talk anything approaching economics I still feel the need to warn of this, but my analysis and predictions have so far been pretty accurate. My thinking going back to early Q2 that we would not emerge until at least early 2010, and possibly not until Q3 2010. If 6 quarters is the worst recession for 54 years, I do wonder where 9 or 10 qtrs will sit?

Why do I think this? Because the Government and the Bank of England have taken measures to ensure that economic corrections are kept to a minimum. 
Now I can understand the politics of this, and they two-fold.

Firstly, it is one of the biggest dividing lines in the minds of Conservative and Labour voters over aged 30. During the 80’s and the 90’s when the UK went into recession the Conservatives allowed the market to contract before recovery with little or no intervention. This allowed for a quicker recovery (in theory) but meant the economy dipped faster and deeper causing many people to lose houses, their livelihoods, their businesses. The Conservative argument would be that the UK economy leading into the 80’s was in need of modernisation and was still built very much in the image of post-war Britain and overly reliant on dying industries. The crashes took a lot of older businesses out, but in the booms allowed for the creation of future industries which we rely upon today. It is an argument that will never probably be settled in broad public opinion. Labour stuck very much then to the politics they have followed during this recession; that Government(s) should intervene to prevent the recession getting too deep at any one point. The argument again would be that (in theory) this will draw out the recession for longer and also that the necessary “corrections” which our future economy may benefit have not had a chance to come into place. Now, I say this not to advocate either position, but, the current path undertaken was one that was known and one of general intervention rather than of allowing market forces to work unfettered.

The second point is as political as it is economic. It was and is a very big gamble. To my mind the Quantitative Easing programme has been a stealth effort in devaluing sterling, which has had some results, not necessarily completely positive, but not disastrous (yet). Of the big economies only Japan and the EURO zone have not followed with similar measures and China’s decision to fix against the Dollar is looking to have been very profitable. The EURO zone may still need to devalue, as it is hard to see it continuing for long at $1.50 to €1.00. The EU including the UK needs grow its Exports, and with the EURO so strong that is not looking likely. The danger of QE is hyperinflation, and clearly the extra money is not being leant as it was supposed to have been, but the UK seems to have been able to leverage its independence from the EURO to keep Sterling attractive and as exports may not have suffered as much as they could have, and we have an advantage, for now, on the EURO zone countries.

On point two however, I think we have our economic independence to thank, as we have been able to make decisions independent of the EU. It could however very quickly turn to be a disadvantage and I would like to see an end to QE and an immediate cut in Government borrowing. As long as we have QE we risk adding hyperinflation to an increasing unserviceable debt mountain. That would be like the perfect storm of recessions.

I really do not see any long standing positivity until Government and personal debt is slashed. I think individuals have responded and in 2009 are directing income into repaying debt rather than spending. This trend will continue. The Government needs to do the same. Though it will probably not do so and it will fall to an incoming Conservative Government to undo the damage. The sooner it is reigned in the less the UK will need to repay, and the quicker we can head to recovery. Individuals need to start spending, but day to day spending needs to not be linked to personal debt such as credit cards. As the nation’s credit rating improves, sensible borrowing for houses and big items like cars will aid recovery further.

Anyway, that’s my take, and that is what I am basing my personal economic decisions on. Recessions are ugly, and unfortunately I think until we can point to “corrections” all we have is the same struggling economy, the pain will have to be felt a lot more harshly somewhere – and I am not sure where; my guess a year ago was on homeowners, but this looks slightly less likely to be the case now. I am sure there are those of you who will disagree and that’s fine, but if you are rebutting in the comments, please keep it in layman’s terms as much as possible as like I said, I am not an economist. [So, don’t bet your house on my economic predictions!]

No surprises from me that we are still in recession. I still think there is one thing that Gordon Brown can do to bring about confidence in the markets and in the public and that would be to call a General Election.

My very final thought is again political. John Major complained of bringing about a “voteless recovery” and reports from Gordon’s bunker were in the same vein. I wonder what will be his cry if there is no recovery to link his lack of votes to?

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