The UK emerges from recession... just
Ted Scott, Director of UK Equity Strategy at F&C, responds to data which shows the UK has officially come out of recession.
The UK has at last come out of the deepest recession since the Second World War, but it is more with a whimper than a bang.
Already the UK has been tardy about resuming growth amongst developed economies with Germany and France emerging from recession over 6 months ago. Indeed, it is possible that the figure could be revised down and in that case the champagne will have to be put on ice for another quarter. Even though it was a positive number at +0.1% growth in the final quarter of 2009 it was well below expectations again (about 0.5% growth).
Why has the UK taken longer to come out of recession compared to other major economies?
The lacklustre performance of the UK economy reflects the nature of the current crisis that Britain was much more deeply embroiled in than most other major economies. The recession has predominantly been a financially induced downturn and the UK was in the vanguard in this respect, with its banking system behaving with reckless abandon that almost caused a complete financial meltdown.
As we now know, the banking system was effectively rescued via the taxpayer but the effects (both short and long term) are such that economic growth has been and will continue to be compromised. The banks are reluctant to lend as they seek to rebuild their balance sheets and as bank lending provides the oxygen via which the economy can grow it is continuing to restrict economic growth. Indeed, this major constraint on the future growth profile for the economy has persisted despite the huge monetary stimulus provided by record low interest rates and the quantitative easing (QE) programme that has injected massive liquidity into the financial system.
The outlook, therefore, is for a muted and protracted recovery and today's news suggests it is likely to be even more of an uphill struggle than had previously been supposed. It means for the foreseeable future that the UK economy will probably grow at well below trend (about 2.5-3%GDP per annum). The consensus forecast for 2010 is about 2% and this now looks too high in the light of the disappointing data for both the 3rd and 4th quarters of last year. It means the accommodative monetary policy will remain in place longer than hitherto expected and may even prompt the MPC to extend QE at next month's meeting.
For the stock market the weak showing of the economy is less relevant as so much of the UK market's earnings are derived from overseas (about 2/3rds). Nevertheless, for domestic stocks it is clearly a negative factor and from a macro viewpoint it will make it more difficult for the Government to address the pressing issue of the large deficit with the amount of debt on its books relative to GDP at a record high for peace time.
How the authorities are going to tackle its debt is something that has not been properly addressed yet, partly because we have an impending General Election. However, today's news highlights the urgency of a cogent and workable plan that will reduce our public borrowings while at the same time restoring the economy to an accelerating growth path. If this is not done the UK's sovereign debt could come under the spotlight, just as it has in less stable and smaller economies recently. Whether or not the UK corporate sector's profits are mainly sourced from overseas or not, a currency crisis would through the equity market into a tail spin. That is why today's news is significant.