A flatlining UK economy

And the rollercoaster called Europe

Of great significance to all investors in the longer term is the pace of recovery in the US and Far East. We asked peter Stanyer, our independent economist, to comment on our current plight.

 An economist’s view…

Peter Stanyer
Independent Economic Consultant and author of the Economist’s Guide to Investment, Profile Books, 2010

To find out more about Peter’s extensive career, click here

The rollercoaster of fluctuating sentiment in the economy and financial markets shows no sign of abating. Recent data reinforces the message that the UK is recovering more sluggishly from the financial crisis than from any recession in the past 100 years, including the great depression following the crash of 1929. The economy has now effectively flat-lined for an unprecedented 18 months. 

The slowness of the recovery makes it inevitable that the Bank of England’s policy of maintaining ultra-low interest rates will be with us for even longer, as will the debate over whether the government should spend and borrow more, despite its existing mountain of debt.

The Bank of England’s monetary policy

Its policy is deliberately designed to encourage investors to take more risk (and for those nearing retirement, to work for longer) than they otherwise would wish. It is forcing an enormous transfer of wealth from savers to borrowers. Cautious investors, who rely on the security of income from high quality bonds, may still be less than half way through a very painful lost decade of meagre investment returns.

Outside the UK

Storm clouds from the euro-zone are looking as threatening as ever. As usual, economists are divided, this time on whether they expect Greece to leave the euro, and if it did, whether this would eventually be a good thing or a very bad thing for Greece, the euro-zone and financial markets.  One of the few points of agreement is that it would be good for bank note printers and lawyers. 

The optimistic scenario

This sees a Greek exit as galvanising the rest of the euro-zone into functioning like a proper country, with, for example, effective central controls over regional government budgets. But it is still far from clear that members of the euro-zone (including Germany and France) have signed up to being subsidiary regions (however important) of a country called “Europe”.  

The global view

Globally however, the picture is different. Large parts of Europe may be feeling fragile, but Asia is certainly not.  (And neither are many European exporters.)  There is occurring a major shift in the pattern of world trade with a rapid increase in so-called “south-south” trade among emerging markets as domestic demand takes over from exports as the main driver of growth. 

Growth in China

This may be slowing a bit, but the power of compounding means that the larger China economy will almost certainly make an increasing contribution  to global prosperity even with its own slightly slower growth rate.

Meanwhile, the US shows signs of recovery

Housing is increasingly affordable (more so than for 20 years for those not trapped in negative equity) and US industry increasingly competitive, helped by major reductions in gas prices. Damage could still be done by disputes over Federal government tax and spend policies, on which Democrats and Republicans have seemingly irreconcilable differences.  Apart from this cloud, however, improved prospects for the US will be the eventual signal for higher interest rates in the US, which would most likely be reflected quite quickly in the UK.  

A final thought, however, for those approaching retirement…

In the interim, those approaching retirement should note the encouragement from the Bank of England: please help the UK economy recover by staying at work a few years longer.  Only then perhaps, will there be more sensible interest rates on offer to secure a pension!

Peter Stanyer
31st May 2012