The MT Diary

Is the UK really out of recession? Our diarist applies the science of hunch and anecdote.

by Howard Davies
Last Updated: 31 Aug 2010

The surveys come thick and fast: one up, the next down. Purchasing managers are more optimistic, but manufacturing output doesn't respond. House prices rise, but households are cutting back on debt. It must be tough in the Bank of England trying to make sense of it all. Is the recession over, or not?

When I was at the CBI, I found a little company that made till-rolls for retailers. The number of miles of paper it produced correlated closely with economic output, at least for a time. But technological change mucked up the series. So I will have to revert to a scientific mixture of hunch, anecdote and gossip. Using these precise tools, how does it look to me?

On the one hand, there are signs of life in the financial sector. Indeed, from a political point of view, there may be too many. Bonus offers are moving up, and two-year guaranteed deals are back in fashion. Some firms cut back too sharply on their recruitment and now they have been going back to universities to hoover up more cannon fodder.

Fund managers are enjoying a renaissance. Low interest on bank deposits is fuelling inflows. Some of them have never had it so good. That phenomenon is undoubtedly behind the Stock Market bounce, too. The cash has to find an outlet somewhere.

But the picture in the plain vanilla banking market is different. There is little sign of a pick-up in lending to corporates and it is demand that is weak now, rather than supply. Companies are paying down debt, and we saw the first aggregate cutback in household debt for more than a decade. I'm not sure if there are any old-style bank managers left, but if there are, they have been on the golf course, rather than poring over business plans in the corner workspaces of their customer-friendly Caffe Nero.

On the third hand (one needs quite a lot of hands these days to give a balanced picture), there are signs of life in what is euphemistically called corporate activity - bonds, IPOs and M&A to you and me. A friend in financial PR (someone has to befriend them) found the phone ringing off the hook on returning from her chateau. Mainly foreign companies, interestingly enough, are still coming to do business in London. Those Reykjavik-on-Thames forecasts do not seem to have come to fruition.

Nor do we yet observe an exodus of hedge funds - a spectre raised by Boris Johnson. The Government is right in saying that there are many things wrong with the proposed European directive, but the one sure way of making it worse is to turn it into a big Anglo-French political issue, as Johnson has done. Everyone in the City is praying that Boris finds something else to occupy his time, and does not pull any more counterproductive stunts in Brussels.

But what of the real economy? Well, manufacturing is going nowhere fast, but I do not detect the anxiety one encountered six months ago. I thought builders would be badly hit, but down in darkest Dorset that does not seem to be the case. At Davies Mansions, we plan to refurbish the east wing - regild the turrets, that sort of thing. We are told that the idea of asking for competing tenders is old hat. If you can find a builder prepared to come down your drive, he will be kind enough to tell you what the price will be. As for eco-builders, don't even think about it. You might want to go green, but you can't do so before 2015.

And as a positive consequence of global warming, a big new vineyard has opened up a few fields away, producing a white very acceptable in some fancy premises. It's flying off the shelves at the local farm shop, which has expanded yet further every time I've dropped in for some fir apples and organic celeriac.

But there seems to be a dislocation still between the micro and the macro. I find it hard to dismiss the idea that recovery will be beating into a strong headwind. The deleveraging process could have a way to go, and it is difficult to see a return to the debt-fuelled boom conditions of the early years of this century.

Then there is the public sector, where the mood is about as black as can be. And we know that VAT will go back up to 17.5% in January, and people seem to have forgotten the impact of the increase in the top marginal tax rate and the reduction of personal allowances that will come in next April. That is going to be a nasty shock - only to high earners, of course, but their money trickles down.

The next expenditure round will be miserable for every creature of the state. Implausibly, we hear that the Health Service will be protected, though McKinsey has disobligingly produced evidence that staff cuts may be needed to balance the books. Over the past year, the public sector has been a counter-cyclical spender. There have been some big pay increases, as well as more investment. All of that will come to a grinding halt within the next 12 months, whoever wins.

Now I have got to the ninth hand, where does it all end up? My money is on a recovery beginning later this year, but a very sluggish one, for as far ahead as I can see. Certainly, I cannot see sound justification for the big run-up in stock prices that we've seen. If I can find a green builder who produces English wine on the side, that's where my money will go.


Howard Davies is the director of the London School of Economics

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