Equity market continue to rise as the UK Economy Heads For Triple Dip

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Just a few days ago, the UK Office for National Statistics (ONS) released the latest GDP numbers for our embattled economy and which confirmed what many had feared – the British economy dipped 0.3% in the fourth quarter of 2012 and is heading into recession for the third time since 2008.

The “unwillingness” of this recession to go away is frustrating everyone from the common citizen to Government and the Bank of England. It is even reviving negative sentiment against Europe with David Cameron pressing ahead with a vote on remaining within the EU.

When the economy is healthy, everything seems hunky-dory and few questions are asked as to how money is spent but, when we enter long periods of moribund economic activity as we are now, fingers start being pointed at Government. In our opinion, it is fair to say that the present coalition Government inherited something of a poisoned chalice from the outgoing Labour Government. Rarely in peace time has an economy been left in such a mess as the two twin numbnuts of Brown and Balls handed over to Cameron and Clegg in 2010. How on earth Balls dares to stand up in Parliament and throw mud at Osborne over the current economic woes is utterly beyond us. He should be done for economic crimes in my opinion and slink into the shadows of the backbenches like Brown has done.

The current crisis is simply a result of years of consumer and government spending above reasonable levels, years of growing public sector debt without limits, with the monies being spent on spurious projects. Although it is fair to say this not only affected the UK but everywhere in Europe and the US.

Politicians are now trying to cut the overall level of debt but, such is the debt overhang, that even the ultra loose monetary policy is having a limited effect aside from in certain subsectors that are and were doing OK – cash rich individuals and companies that can take advantage of the bargains offered by distressed sellers.

The Chancellor is not for turning

Something dramatic has to been done to regain control of public finances. The current measures of public sector cuts in Government spending must be implemented, of that there’s no doubt. The recession isn’t also purely a British problem but rather a European one. The renewed weakness of the Pound will help matters of course but it is no panacea, contrary to Merv “the Swerve” King’s expectations… Let’s hope Mark Carney proves more effective.

Debt has been rising in many European countries and with every Government in Europe trying to cut spending at the same time after thirty years of exponential debt growth, the collective results are proving extremely frustrating to policy makers. The more austerity that Governments impose, the worst the results are. The resilience we see in this recession is an obvious result of these measures which are aimed at producing results in the short term like reductions in debt to GDP instead of addressing the required structural changes needed. The current recession in the UK is not particularly deep ,it is a rather shallow albeit prolonged one.

Recessions in the UK Since 1930

In order to compare the current recession with others that have been experienced in the UK, we collected data for real GDP growth since 1930 from the ONS and Bank of England databases. The technical definition of a recession is a period of two consecutive quarters with negative GDP growth.

In certain cases, the economy came out of recession after one or two periods only to dip again. We break the current recession into two, because between the first and second dips there was a period of four quarters with modest economic recovery. Using this methodology, we identified six periods of recession which are summarised below.


The recession experienced between the second quarter of 2008 and the second quarter of 2009, wiped out a particularly large 6.3% of UK GDP – a period that many in the press compare with the Great Depression. The Great Depression started in 1929 & was primarily a US crisis that only indirectly affected the UK as demand for British products sank. At the same time, high interest rates in order to keep to the requirements of the Gold standard at the time was one of the main contributors to the crisis. When the UK left the Gold standard, the effects of the crisis lessened – one could argue that the present day deep public sector cuts policy is the modern day equivalent of the millstone of the Gold standard.

UK and Europe

Let’s now compare the current recession observed in other European countries with the UK. The following chart shows accumulated GDP growth rates between the second quarter of 2008 and the third quarter of 2012.

The UK has been performing worse than Germany and France but not much worse than the Eurozone or the EU as a whole. Recession in Germany was even worse than in the UK at the beginning. The problem for the UK is that after bottoming in 2Q 2009, the recovery experienced by the British economy has been extremely slow and even now, five years of starting, the economy is still 3.4% worse off than it was before the crisis. Ditto with Italy, Spain, Portugal and Greece.

Concluding Remarks

It’s frustrating for everyone to see the UK economy struggling to grow and, for many, perplexing to see the equity market rise in the face of this.

In the past, Governments have used fiscal policy to manage recessions in a Keynesian style yet today we see them adding to the crisis with fiscal contraction… The choices aren’t easy however – relax the present fiscal contraction steps and risk the irk of the markets through sovereign debt downgrades and then consequent rising bond yields which would also act as a brake on the domestic economy or stick to the current path that is simply not generating sufficient self sustaining growth.

If Government simply throws money at the economy, the economy may initially grow but then debt will also grow and ratings agencies will certainly bite on the AAA rating. This point alone is the reason Ed Balls should be thrown out of his party – that is precisely the path he is recommending!

Meanwhile, it is an interesting observation that the FTSE was quoted at 6,730 in October 2007, just before entering the bear market but is currently sitting around 6,330, just 6% shy of pre-crisis levels – almost in line with the GDP drop experienced…

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