Archive for August, 2012
The UK economy is hardly unique in that it currently faces difficulties. Nor is it unique in enjoying “safe haven” status. While this status is not guaranteed, it is to be hoped that it will last until confidence returns. Unfortunately, this week’s release of government borrowing data for July has drawn increased attention to the country’s weak debt position – something with which readers of this blog will be familiar, but which has tended to be ignored or dismissed by most observers who have chosen to believe that the UK is undergoing an “austere” level of fiscal consolidation.
In the words of the report issued by the Office for Budget Responsibility:
Excluding the impact of moving the Royal Mail’s historic pension fund deficit and associated assets into the public sector, the March Economic and fiscal outlook (EFO) forecast a £5.1 billion improvement in PSNB in 2012-13 compared to 2011-12. But after the first four months of the financial year, PSNB (excluding Royal Mail) is £9.3 billion higher than last year.
The figures at the back of the OBR report show that this increase puts UK borrowing 26% over where it was for April-July last year, and that borrowing now needs to fall by 16% for the government to hit its (undemanding) target for reducing the 2012-13 budget deficit to £119.9bn from £125bn the previous year.
Still, we must not be too gloomy. As the OBR notes, monthly data on fiscal receipts and outlays are volatile and subject to revision. And only a month ago, S&P affirmed the UK’s AAA credit rating and stable outlook, while observing that they thought the OBR’s estimates for growth and government debt over the short term were too optimistic. (Their full report can be summarised as: “despite its weak growth and large debt burden, Britain isn’t in the euro and that’s good enough for us.”)
Like all governments, our own has made mistakes. The use of indirect taxes to help bolster receipts ramped up inflation, which squeezed wage growth and pushed the household sector into recession. And just as this effect has begun to recede, our strengthening currency has seen real exports fall for two consecutive quarters (sterling has risen some 11% against the euro over the last twelve months). But if there are no shocks, the economy should manage to muddle through the current period of stagnation. Growth should return, employment continue to grow – and debt reduction targets will have a much better chance of being hit.
All the recent borrowing numbers really do, then, is remind us that the UK has never been a safe haven from the sovereign crisis on the basis of its own debt fundamentals. If anyone begins to think that this matters – one of S&P’s competitor “agencies”, for instance – it could still spell trouble. Otherwise, Britain ought to get away with it.
It may be a quiet summer – for the moment – but what a difference a few days makes. Last week it seemed that (developed) world growth had flattened; this week it was confirmed. Only yesterday the Bank of England Inflation Report forecast 2012 GDP growth of around zero. This morning, French industrial production for June came in at exactly 0.0%, bringing the year-over-year number down to -2.3%. And China reported export growth over the year of only 1%, down from 11% the previous month.
At the same time, reported Q2 earnings for the S&P 500 index – which had been growing at a reasonable rate in prior quarters – are almost exactly unchanged on a year ago. Flat economy, flat earnings: not much to be positive about there.
Still, some perspective is needed before we get too bearish about these recent numbers. In the UK for instance, where year on year GDP growth fell to -6.1% in real terms at the nadir of the recession in 2009, flat growth this year doesn’t look too bad by comparison. In France too, industrial production was falling by over 19% at the worst point in ’09, and China lost 26% of her exports at the same time.
In other words, the disappointment and stagnation we’re seeing today is an order of magnitude less concerning than the painful contraction witnessed in the aftermath of the credit crunch.
That’s not to dismiss it entirely of course. A growth hiatus is a bleak substitute for growth. But it’s better than collapse.
We recently looked at the old adage “sell in May“, wondering whether it would prove as valuable a tip for stock market behaviour as it would have done last year – and (almost, but not quite) in 2010 too. Since then of course, while an investor who sold on May Day itself would still be just about on the right side of the trade, the FTSE 100 index – which averaged about 5,460 over May as a whole – has recovered, and at the time of writing is roughly 5% higher than that.
In reality, “sell in May” – like the January effect, and others – is one of those calendar-based phenomena that don’t really exist. Or being kinder: is an effect which did once exist (perhaps) but has since become less reliable as markets have tended towards greater efficiency over time.
A similar-yet-different seasonal effect is the summer lull. As we described it two years ago, this is the period roughly between Wimbledon and the end of the school holidays when “senior market participants are hosted at a series of high profile sporting events before being flown off to their holiday homes and luxury hotels. Their deserted offices are not supposed to witness much in the way of interesting activity during the period.”
London is in the middle of the highest profile event of them all of course, so it is appropriate that the summer lull seems to be making a comeback.
Sticking with the UK index as an example, the FTSE 100 floated a stately 1.2% higher this July, its smallest percentage movement for the month since 2004. Over the last few years the summer months have been positively volatile: 2008 was marked by darkening gloom as the credit crunch became an international recession, 2009 saw a powerful relief rally, 2010 a significant rebound from the world’s first shock over the situation in Greece, and last year a flash crash from which the recovery remains only partial.
Perhaps the Olympics will combine with the usual features of the summer break to give markets a respite this year. Such an outcome would certainly be welcome to many.
There is, however, a lot of summer left to go. While real catastrophe continues to elude us – waiting in the wings, to take the bearish view – developed world growth remains sub-trend at best, reported earnings and other indicators suggest a period of broadly flat economic activity and there is always some European statement / election / decision / downgrade waiting to terrify everybody.
It’s a rum time for finance when boredom looks attractive. But with one alternative prospect being calamity, that’s the way things are.