UK News

Ignore the data, Royal Wedding and sunshine give Britain Plc a Q2 kickstart

A lot of the economic data in recent days has made for pretty grim reading, reinforcing expectations that interest rates will remain at record lows for some months yet.

But a string of bullish updates from British retailers and manufacturers suggest that the second quarter could have got off to a flying start, with fine weather, the Easter holiday and the Royal Wedding all improving the national mood.

Anybody who ignores such signals from within the real economy does so at their peril. In January the pound tumbled when it emerged that the British economy had suffered a shock contraction in the final three months of 2010. The market was caught off guard again a month later when revisions painted an even bleaker picture.

Those of us who had been following closely the steady stream of profit warnings from UK retailers, travel groups and builders were not quite so surprised, particularly as we churned out long lists of companies hit by December’s big freeze and predicted a looming standstill in the construction industry.

The big question now is whether the glow left by a month of unusually sunny weather and two holidays in swift succession for Easter and the Royal Wedding will translate into a sustainable recovery, or at the very least be enough to dull some of the pain of government cutbacks and job losses.

Supermarket group Morrison is sounding very cautious this morning. In common with a growing pack of retailers it has reported stronger than expected sales thanks to a bumper April but has not raised its forecasts for 2011 as a whole, citing falling disposable incomes and economic uncertainty.

from Matt Falloon:

It’s snow joke

Snow or no snow, these GDP figures are a nightmare for the Conservative-Liberal Democrat coalition government and throw up the risk of a self-fulfilling spiral of gloom.

When the shock 0.5 percent drop in economic output at the end of 2010 hits television screens on Tuesday night as families sit down to dinner, already-cautious consumers will feel more than a winter chill.

These numbers are likely to knock confidence just when the government needs businesses and households to step up to the plate.

Will businesses unleash investment and take on hoards of new staff now, or will they wait for signs of improvement?

Will families, facing a hike in VAT sales tax and high inflation, flash the credit card on big purchases or tighten their belts and hope for cheaper prices in the future?

If either of those scenarios play out over the next few months, Britain's economy faces a real risk of stagnating or worse -- and that doesn't even start to take into account the spending cuts waiting in the wings this year.

Even without the snow, the economy still ground to a halt in the last three months of 2010.

from MacroScope:

Slowing growth, MPC splits? That’s so 2008

Sixties nostalgia was all the rage in the late 90s, and towards the end of the last decade we looked back only 20 years or so for a massive 80s revival in electronic pop and fashion.

With the 2010s in full flow, the current vogue of choice derives from just two years ago – at least among those noted trendsetters, economists.

Back in mid-2008, the signs for the UK economy were confusing and ominous. Inflation was too high, forward-looking indicators pointed to a slowdown of some sort in the near future, and the July minutes of the Bank of England’s monetary policy committee showed they debated both easing and tightening interest rate policy.

Step forward into 2010. In Wednesday’s July MPC minutes they discussed both easing and tightening while digesting a puzzling picture of – yes – high inflation and forward-looking surveys pointing to a slowdown of some sort in the near future.

“Do we have a much clearer idea over where monetary policy is going in the rest of the year?” asked Investec economist Philip Shaw after seeing the latest minutes.

“No. It’s shrouded in confusion,” was the stark conclusion.

Reuters’ latest long-term UK economy poll underscored this familiar sense of doubt. It showed a range of some 2.7 percentage points separating the lowest and highest forecasts for UK economic growth next year, compared to a 2.4 percentage points gap in the corresponding forecasts from the July 2008 poll.

from The Great Debate UK:

Double dip a done deal?

-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

Earlier this week the S&P 500 was down 15 percent from its April 2010 high.   The ongoing debate on whether the U.S. economy is poised for a double dip recession can be linked with these falls.

At present there is insufficient evidence to conclude that the U.S. economy will fall back into recession, though there are signs that the recovery could be losing momentum.  A key question is whether the adjustment in asset prices seen since the end of April has been appropriate.

Proponents of double-dip imply that asset prices may have further to fall.  In contrast, die hard bulls suggest that equity valuations are looking cheap.  In the past few sessions, the bulls have been gaining the upper hand.

The reining in of government fiscal incentives and in many cases the implementation of austerity measures suggests that economic growth in most of the developed world will be constrained for the next few years.

The release a month ago of the much worse than expected May U.S. Labour report was followed by a bout of poor U.S. housing and confidence data  that had the effect of triggering a wide scale debate about the prospects for double dip recession in the U.S.

Once a prince of darkness, now loving the limelight

“Enjoy it!” That was the message from Peter Mandelson to Labour supporters this morning as he launched a vitriolic attack on the Conservatives during a speech in central London, clearly relishing every minute of it. Once nicknamed the “prince of darkness” for his ability to mastermind Labour’s strategy from behind the scenes, Mandelson has transformed into the party’s best public performer.

It was different in the days of Tony Blair, who could go out and dazzle the voters with his easy charm and passionate oratory, leaving Mandelson to the backroom strategic thinking that helped sweep New Labour into power in 1997 and keep them there for 13 years. Now fronted by Gordon Brown, whose strength lies more in his grasp of policy detail than in his presentational skills, and trailing the Conservatives in the polls a month before an election, Labour need all the charisma they can get. Mandelson has stepped up to deliver it, with evident jubilation.

Denouncing the Conservatives as “parish pump politicians for a global age”, Mandelson insisted that David Cameron and George Osborne had not really modernised their party but rather were still guided by a Thatcherite instinct to cut taxes, cut public spending, keep the state out of the economy as much as possible and hope for the best.

“How limp!” he cried, waving his arms in mock amazement. “How pathetic! How unimaginative! How unsmart!” This was a “dumbing down, bargain-basement approach to competitiveness”, he said, asserting that Conservative views on the role of the state in economic management “belonged in the Ark, aeons ago”.

Labour, in contrast, had learnt the lessons of the global financial crisis, he said, and knew that the markets could not be left entirely to their own devices. They should be given a helping hand by a government with a single-minded focus on building new sources of competitive strength for Britain to face a globalised future. The rise of the Asian middle classes was mentioned as a source of opportunities for Britain to compete in high-tech and knowledge-based services like health, education and sustainable energy.

“No one’s more pro-markets than I am in New Labour, heaven knows, but they have their limitations,” Mandelson said, getting a chuckle from an audience all too aware that many of the party’s more left-leaning supporters are uncomfortable with his cosy relationship with business. This is, after all, a man who once remarked that Labour was “intensely relaxed about people getting filthy rich”.

Warming to his subject, Mandelson went on to say he agreed with his opposite number on the Conservative front bench, Ken Clarke, about a lot of things — though it was a case of damning with faint praise as he lauded Clarke’s “bonhomie and warm words”. The real shame, Mandelson said, was that Clarke was so isolated in his own party, particularly on the issue of Britain’s relations with the European Union. (Clarke is well-known for his pro-EU stance, a rarity in his party, while Mandelson is a former EU trade commissioner.)

Budget for votes riskily delays UK debt pain

– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

Alistair Darling promised no election “giveaways” and in one sense he delivered. The UK finance minister’s budget is about not giving away the election. It might have been worse — if Darling had acceded to his boss Gordon Brown’s even more populist instincts. But there are vote-seeking swipes at high earners and banks, as well as a crowd-pleasing but misguided tax cut to first-time house-buyers. The UK’s budget-balancing pain is being postponed and concealed. And that’s risky.

The headline measure is a tax cut. First time buyers of properties costing up to 250,000 pounds won’t have to pay anything to the government. Many voters will like that. They will like it, too, that people buying million pound properties foot the bill. A further bout of bank-bashing was part of the electioneering approach. Given the scandal of City rewards, few will blame Darling.

The economic impact, however, will be limited. The wobbly housing market may be helped slightly. But the UK economy needs to be buoyed by production and exports, not house price inflation.

Even so, Darling was able to present slightly better borrowing figures. VAT revenues have picked up strongly so far this year. Unemployment has not risen as much as feared. The budget projects a 167 billion pound deficit for this year, an 11 billion pound reduction on the previous forecast. And over the next several years a similar improvement is retained. But in 2010-11 the projected government deficit remains a colossal 163 billion pounds, 11 percent of GDP.

Thereafter, the deficit shrinks more rapidly as spending cuts start to take effect. But financial markets may not give much credit to these medium-term forecasts, because Darling has neglected to say where the cuts will fall — presumably because he thinks it will be too distasteful for voters to see. What’s more, he only reduces the red ink by projecting fairly rapid GDP growth of 3.25 percent next year and an average of 3.5 percent in 2012 and beyond. As the UK restructures, growth is unlikely to be high.

It is probably only a matter of time before financial markets signal, through interest rates, that their patience has run out. That moment could come soon if Greece or other troubled euro zone economies cause a new wave of risk aversion. But Labour’s hope that the budget will get it through to the election will probably be fulfilled. Then it will be up to either an incoming Conservative government to tighten its belt or re-elected Labour to spell out where the spending axe will fall.

Webcast: Gordon Brown’s speech at Thomson Reuters

Prime Minister Gordon Brown set out his economic plans during a Newsmaker event at Thomson Reuters on Wednesday. Brown said he believed Britain would maintain its coveted AAA credit rating and announced a pay freeze for senior civil servants and military officers to help reduce a record deficit.

Below is a recorded webcast of Brown’s speech and the Q&A session that followed.

Newsmaker with David Cameron, George Osborne and Ken Clarke

Leader of the Conservative Party David Cameron, Shadow Chancellor of the Exchequer George Osborne and Shadow Secretary of State for Business Ken Clarke will join us on Tuesday March 2 to give speeches and take part in a Q&A session on the economy.

With a recent newspaper poll showing Labour could hold on to power after an election due in the next few months, Cameron has admitted that the Tories now have a “fight on their hands” to prevent a fourth successive election win for Labour.

Another recent poll showed, for the first time since July 2007, people trusted Labour more than the Conservatives to run the economy.

The Conservatives have made dealing with the budget deficit, expected to be around 12 percent of economic output this year, one of the key themes of their election campaign. Ken Clarke was Chancellor of the Exchequer under John Major.

Follow our live, minute-by-minute coverage of the event  from 1000 GMT by following this link to our live blog.

If you could put a question to Cameron, Osborne or Clarke, what would it be? Send us your comments and questions ahead of the event.

Has Alistair Darling done enough to revive Labour’s electoral hopes?

So how was it for you?

Chancellor Alistair Darling threw the dice in his pre-budget report in an attempt to bolster Labour’s chances of winning the general election in 2010.

From hitting bankers with a one-off bonus tax to lowering bingo duty, Darling played to the Labour heartlands, while hoping to win back voters who have been telling pollsters that they are done with Gordon Brown.

Other measures included the return of full value added tax in January, a 2.5 percent rise in the basic state pension, a 1.5 percent increase in child benefit, as well as help for small businesses and various initiatives to boost the government’s green credentials.

All this while admitting that the recession was worse than he had predicted, with the economy shrinking by 4.75 percent in 2009.

Not surprisingly Darling’s Conservative counterpart George Osborne wasn’t impressed, accusing the chancellor of  “sleight of hand” and “sneaky fiddling”.

Let us know what you think of the Chancellor’s pre-budget report and whether it will resuscitate Labour’s electoral hopes?

from The Great Debate UK:

Why is the UK still in recession when the U.S. isn’t?

Recent U.S.  gross domestic product data show the world's biggest economy emerged from recession in the third quarter, while in the UK data show that in the same period Britain's economy contracted.

British economist and author John Kay theorizes that Britain is mired in its worst recession on record in part because government support has not been evenly distributed across sectors.

"We've poured money into the financial sector -- by and large the financial sector in Britain is doing OK," he said.  "But very little of that is getting through to small and medium-size businesses out there in the rest of the economy."