Is the sustainability of the UK Economic Recovery, a myth or a reality?

The announcement on the 11/11/2009 by governor of the Bank of England, Melvyn King noting that the UK economy is “only just started” recovering may have offered some comfort to the financial markets and investing communities.

 

BBC : http://news.bbc.co.uk/1/hi/business/8353931.stm In this article , BOE believe that a full recovery is anticipated by late 2011. The present inflation at 1.1%, on the back of GDP that unexpected drop by 0.2% in the quarter to September 2009. This was a far optimistic picture than those disclosed on the 23/10/2009 when GDP drop was announced. In all objectivity, when reports of such and expressions of opinion are raised, there is always a contradiction over the state of the economy. BOE and MPC continue to take a vague stance on the effectiveness of the monetary and fiscal strategies by stating things such as “open minded” about QE, further public spending at one level and desirable cuts at the next and then question the level of government debt problems the next. No doubt, the UK economic recession is unprecedented, the lack of clear messages and lead to loss of confidence by the financial community. I note a response by a former MPC member, Professor Blanchflower who raised doubts about the strength of the economy which is driven by government stimulus packages, and then look at information about the “real economy” with firms still not hiring evidenced by jobless rates, and a vast majority of established firms still posting losses apart from “budget” and “low cost, no frills” companies. The rate of business closures is still quite alarming.

The Economist :  http://www.economist.com/theworldin/displaystory.cfm?story_id=14742208. Britain's economic outlook: Still overcast, but brightening dated 12/11/2009. This article describes the sum of positives: Stronger labour market, lower Unemployment at 7.8% (compared to 10% predicted earlier), production index growing by 1.6% in September 2009 as compared to August 2009 and various surveys by purchasing managers showing growth and British Retail Consortium reporting buoyant sales. I believe that this information although bearing facts from statistics and reports, the question of sustainability remains to be seen. Why? Because a number of analysts including Melvyn King argued that there is still a downward pressure. In addition, the massive budget deficit warning by Fitch, a credit-rating agency, suggest that Britain was most at risk of losing its prized triple-A status as a sovereign borrower.  http://www.economist.com/theworldin/displaystory.cfm?story_id=14742208. These mixed messages demonstrate that the state of the economy is fragile and it is not possible to confirm recovery.

This is Money: The economy: From delusion to desolation dated 18 October 2009 presented an interesting article on how the economy is likely to increase the cost of living of her citizens over the next ten years. Of gem claimed that household energy bills could soar by up to 60% and cost of fuel to rise from 8.6% to 12% next year. The Institute for Fiscal Studies noted that the wrecked public finances, will cost each family £930 a year in taxes between now and 2018, the average household direct tax bill will rise by 8.6%.  A rather pessimistic article, which may hold some truth since both Labour and the Conservative party are proposing high income taxes. Is this the right move? With more businesses moving their UK headquarters to lower tax countries, and Britain risks seeing more people leaving the country, as evidenced from UK Border Control, the strategy of economic recovery may lead to less tax revenue for the government.

BBC : http://news.bbc.co.uk/1/hi/business/8199970.stm I chose this article as it compared Britain and the Euro zone to appreciate the sustainability of UK economic policies. The article noted France and Germany recovery as compared to UK and provided a good commentary about why it would take longer for Britain to recover. With the UK government spending £1.5 trillion, £200 billion on QE, no other country in the Euro zone have invested so significantly. I believe that the pessimism grounded by the article is valid. Why? The UK, unlike Germany and France, is (1)very dependent on the financial sector, (2)consumers are more in debt and (3)the huge credits available meant that unlike Germany and France who saw the return of domestic demand spurring their economy,  but UK consumers are unlikely to spend their way out of the recession due to enormous debts. On a positive note, the recovery of the UK financial sector to pre-crisis levels are likely to help recovery although the underlying weakness in the real economy may make it unsustainable.

 

To sum up, I chose the article http://www.kleinwortbenson.com/content/269/investors-signal-renewed-hope-in-india to assess market perception of the recent announcement by BOE. Stock investors undecided on market recovery with only 34% believed that the rally signalled market confidence with another 39% not prepared to make confidence predictions offers a good market analysis of the state of the UK Economy. All the articles included in the analysis points out to a very early indication of recovery, a myth to be able to confirm the predictions of a recovery with all the underlying economic issues. The reality of things is that in spite of the size of government spending, there is no evidence of a sustained economic recovery.