It’s official, we’re back in recession with the double dip being confirmed yesterday which is going to simply add to the woes of the coalition and probably cost the incumbent Mayor of London his re-election prospects next week.
Blame is being placed at the feet of George Osborne by the opposition and who would blame them? Voters remain heavily sceptical of Labour and their economic record after being responsible for plunging the economy into its deepest recession for a century, and so they are trying to make as much political capital out of yesterday’s figures as possible by pointing the finger at the government’s austerity measures and spending cuts for the fall in output. There’s no doubt that it is having an effect on the economy and as a result the lack of growth is causing the government to borrow more meaning its deficit reduction targets can be torn up, but there are other far more influential factors that have led to this double dip.
The economy has been flat lining for a year now as bank lending has frozen up, high oil prices continue to send petrol and utility bills through the roof and the problems with our biggest trading partner, the eurozone, which is in another deep recession, are all factors in causing our anaemic growth. A lack of wage growth and high inflation has led to a slump in consumer confidence and people are running just to stand still.
So the government is not to blame solely because of spending cuts, but also their lack of any meaningful plans for growth. Construction and manufacturing were major contributors to the decline in GDP for the first quarter and so far the government has done little to help with any major incentives to businesses in these sectors. A cut in the corporation tax here and raising of the income allowance there is just tinkering when you have an economy that is starved of capital from a banking sector that is being battered by draconian reforms, and when your biggest trading partner is mired in a deep recession as well.
The “recovery” since the last recession in 2008/09 is the worst we’ve seen since the beginning of the last century and the bad news is that it’s not going to get any better. Until inflation normalises and the global picture improves growth in the UK will continue to bumble on or around stagnation. The government could have some impact by making bold decisions on infrastructure spending, lowering taxes and persuading corporate Britain, which is in relatively decent shape and by no means stuck in a deep recession, to invest.
The FTSE of course has taken the news in its stride and is storming ahead this morning up some 40 points to 5760. Yet another indication that despite the poor economic back drop corporations are on the whole producing some decent numbers in this round of earnings. The return of risk appetite after those big losses on Monday indicate that bulls are still not put off by the macro picture, and so resistance levels should be watched carefully which are seen around 5770, 5830 and 5900.
The leading presidential candidate in France, Francois Hollande, vowed to renegotiate the European treaty throwing the fiscal austerity into questioning and keeping the euro at arms length in the first part of the trading session. Later on, the Fed Chairman Ben Bernanke indicated that QE3 is still on the table if needed, thus hurting the dollar. So more on a relative basis, the common currency gained 28 pips against the greenback to close at 1.3222, and this morning it is benefiting from the increase in risk appetite and is trading at 1.3260.
Gold dipped in reaction to the Federal Reserve statement but found good support just above the $1620.00 level. Furthermore the precious metal recouped its losses and even finished up $3.15 at $1643.98, as it appeared the US central bank still considers easing the monetary policy should the economic recovery turn sour. On the long term, gold’s appeal as a hedge against turmoil and the fear of inflation is here to stay. This morning the precious metal is at 1650.