Sunday, January 13, 2013
Glimmers amid the gloom as risks start to fade
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Stock market performance does not always reflect what is happening in the real economy. Many emerging economies have lousy stock markets. Though it has picked up recently, China’s Shanghai composite index is barely a third of the peak it reached a few years ago, in spite of the Chinese economy’s rise.

Conversely, this year’s strong opening for the FTSE-100, taking it to its highest levels since well before the collapse of Lehman Brothers in September 2008, does not seem to reflect any discernible improvement in Britain’s economic performance.

It does, however, reflect something that may impact on that performance, a perception among investors that the risks of another nasty downward lurch in the global economy have diminished.

So China, predicted by some pundits in recent months to be facing a definite hard landing, appears to have come through its mini-crisis rather gently and is gaining a strength which should mean growth of more than 8% this year.

America, judging from the data and surveys, was not too worried about the fiscal cliff shenanigans and has started 2013 with what looks like reasonable momentum.

Even the eurozone appears to be out of the emergency ward with Olli Rehn, the economic affairs commissioner, declaring that the dangers of a eurozone split are over, and Herman van Rompuy, the EU president, declaring that the “existential threat” to the euro was over and that growth should soon resume.

A pinch of salt is necessary. If we listened to the predictions of EU leaders there would never have been a eurozone crisis, let alone one that posed the biggest risk to the world economy and threatened the single currency’s very survival.

Stephen Lewis, veteran City economic commentator with Monument Securities, warns that America’s fiscal problems and the eurozone crisis will return to haunt markets, with Cyprus and Portugal as the next likely flashpoints.

Even so, the nature of the process of recovering from crises is that things do not go from dreadful to perfect overnight. Healing takes time. The more confidence there is that the healing process is under way, however, the better things will start to look, including in Britain.

What does the economy need this year? It needs the supply of credit to improve, so there is a big onus on the Treasury-Bank of England Funding for Lending scheme. It needs inflation to come down and stay down, restoring real incomes and boosting consumer spending. It needs some of the government’s initiatives on infrastructure spending to start showing through.

And it needs, as described above, the fear of new crises to be replaced by a sense that the world is coming through it. Apart from the direct effects on Britain of the eurozone crisis - with exports to the region down by 6% over the past year - it has been the biggest dampener on business confidence.

There are one or two glimmers of a change. The British Chambers of Commerce (BCC), in its latest quarterly survey, reported stronger readings for most of the measures of activity among its members it monitors. There is, it said, “resilience among UK businesses, coupled with rising confidence that the outlook will improve”.

The fourth quarter showed an improvement compared with the third, the BCC said, including a “marked increase in confidence which ... reinforces our view that the economy will recover slowly in 2013.” Though business still yearns for those untroubled pre-crisis days, export readings for the service sector were better than their pre-recession average in 2007.

The BCC, interestingly, sees a very different picture for what was happening last year than the Office for National Statistics. When the official figures were in double-dip territory in the first half of the year, it thinks there was growth, though is sceptical about whether there was any Olympic lift in the third quarter.

It is not the only hopeful sign. The Recruitment and Employment Confederation, with KPMG, takes the temperature of the job market each month. Its latest survey showed employment continuing to rise and job vacancies at their highest for 20 months.

So what will 2013 look like? Four years into a recovery 1% growth is not a lot to ask for. But, though it partly depends on the fourth quarter gross domestic product number in 12 days’ time, which will be depressed by Friday's weak manufacturing numbers. We can hope for more if the international clouds really do lift, but 1% may be as good as it gets.

The job market, having performed extremely well, will continue to generate new jobs. But employment may merely rise in line with the increase in the workforce, so the claimant count measure of unemployment will probably stay close to 1.6m and the wider Labour Force Survey measure remain within sight of 2.5m, barring a growth surprise.

As for the great rebalancing of the economy, we await final figures but the 2012 deficit is likely to have been well over £50 billion, from £20 billion in 2011. If the eurozone does hold up, a narrowing to £40 billion is likely this year; still very large.

I hope inflation will be closer to 2% than 3% or even 4% by the end of the year but anything lower than 2.5% looks optimistic.

There will be plenty to write about Mark Carney, the new Bank of England governor, before and after his arrival from Canada in the summer. He may signal that rates will remain low for a long time (as they have already) but I would not look for any change from 0.5%.

One day Bank rate will go up, reflecting a shift to more favourable economic conditions and a belief among the rate-setters that the economy is strong enough to take it. But, though I hope and believe things are slowly improving, we are not there yet I fear.