Wednesday, 26 January 2011


We build statues out of snow 
and weep to see them melt.

Sir Walter Scott

Yesterday the Office for National Statistics reported that the UK economy shrank by -0.5% in the last quarter of 2010.  The news shocked economists, a consensus of whom had expected UK plc to grow by 0.5%.  Three more months of contraction and the economy will have officially entered another recession... 

Chancellor George Osborne rushed to the TV news studios to tell the world - 17 times over - that Britain's renewed slump was entirely due to snow.

Repeat it enough times George and they're bound to believe you

Now, we didn't need to have seen the news to know how badly retailers must have suffered in December; unfortunately for Mr Osborne, the -0.5% statistic comes principally from data collected in October and November; in their rush to calculate the figures for release the stat boys only estimate the effect of late December, which is when the snows actually descended.  

The fact that Germany also suffered record snowfalls yet still managed to grow is presumably neither here nor there, but we've plenty of reasons to doubt the smooth reassurances of Nosferatu George.  Last night, Channel 4 also drilled down into the Chancellor's claim and found it wanting.

But all this is by the by.

Whether we fall back into recession sooner, or later - it's a toss-up as far as I'm concerned - the bitter truth few are willing to swallow is that the UK economy, alongside Europe and the United States, is entering a period of wrenching readjustment - a season one might usefully think of as an economic winter - which will take the best part of a decade to play out.

Household, banking and government debt is massively above historical norms and much of it must end in default. House prices are at least 30% above their average long-term ratio to incomes, with the likelihood of an eventual undershoot to well below average if past cycles are any guide.  Youth unemployment in many advanced economies, as in the UK, has now exceeded 20%.   

Both direct and indirect taxes have risen meaningfully, as has inflation in food and energy prices, sucking vital purchasing power from increasingly hamstrung British consumers whose wages in real terms are, according the Bank of England, no higher than they were in 2005.  

What's more, the average western worker / baby-boomer is ageing beyond their natural peak-earning & peak-spending years, an unalterable progression which, if historical precedents apply, suggests a long, slow decline in consumer spending directly ahead. 

And the UK government's self-flagellating regime of cuts to public services - which the government's own forecasts accept will lead to a substantial rise in unemployment - has barely even begun.

What is astonishing to me is how economists, policy makers and investors have managed to convince themselves a lasting economic recovery is possible in these circumstances.

Source: Office for National Statistics

Look under the hood: the UK jobs market is only being

held up by PART-TIME employment.  Easy come, easy go...

Don't be fooled by short term gyrations: growth over the next several months may revive, then flag, then revive again, confusing us all and making every prognosticator look foolish for a time.  But I don't see how the long term direction of the economy can be in any doubt.

As things stand, the only bulwark against a further slide is the almost grotesque rise in world stocks and other asset prices being engineered by the US Federal Reserve. The policy of 'QE2' is designed (incredibly, by their own admissionto fool the investing public into spending its stock market 'gains' in the belief that happy days are here again.

QE2 is due to end - if they dare to end it - in June.  Let's see what happens to stocks when they do...



PS.  The power of the Fed's QE2 has been making a fool of me recently (and has humbled many ├╝bersmart market analysts), but I do believe the stock market correction I flagged up in mid-December is now upon us; as I noted, the uptrend can persist for quite some time before gravity kicks in. With Fed $billions now being pumped into the market on an almost daily basis, the pull-back is likely to be jagged, stealthy and limited to no more than -10%; indeed for shorter-term traders it should be worth buying into, as the ultimate market top for the whole move since '09 is not yet in sight.