What happens when you take the stabilisers off a bike?

For many, the letters V and W are synonymous with cars; for me, they denote the shape of this nation’s economic recovery. Some optimistic economic commentators and politicians would have us believe that we are out of the woods and that the worst is over. I am firmly in the W camp; I believe that that the UK will post a loss in the first quarter of 2010 and we will see a ‘double dip’ recovery.

Why so pessimistic? (I hear you ask). Surely all the banks have flushed out their bad debt? Aren’t house prices increasing every time you pick up a newspaper? Well, the UK is like a bike with stabilisers at the moment, and when the stabilisers come off not even Chris Hoy could ride this bike without faltering.

UK Plc grew by only 0.1% in Q4 2009, as reported by the BBC. I must admit that when I read this headline, I wondered how may times the figures had been counted as ministers searched for even the slimiest margin of growth.

Here are some of the contributing factors to a potential double dip:


Quantitative easing
QE (or the art of printing money to you and me) has propped up the UK for a number of months. Last week, the monetary policy committee cut off the supply of QE to the UK economy, and this, coupled with the European Central Bank’s upcoming withdrawal of its liquidity boost in March, highlights the deteriorating levels of liquidity around the world

Greek debt
We saw the Dubai debt crisis unfold at the tail end of last year. Many British (and some state-owned) banks had interests in the debt of Dubai World, and if it hadn’t been for Abu Dhabi offering a helping hand to its Emirati neighbour, then potentially billions of pounds of debt would have been defaulted on. This would have resulted in more write downs by UK banks. Greece is facing a similar issue, which is resulting in uncertainty in the entire EU. As I write, the Euro has slipped to a nine-month low. British holidaymakers might see this as a good thing, but the destabilisation of the European single currency will have an adverse effect on the whole region; a region which is Britain’s biggest export market.

Bad weather in January
Despite Alasdair Darling’s best efforts, Mother Nature always holds the trump card. The snow kept a lot of people away from the sales and out of restaurants and bars. It’s likely that the prolonged period of cold will have an adverse effect on some Q1 retail figures, reports Management Today on the effects on the high street. With more snow forecast, this could only exasperate the problem.

Stamp duty holiday ended
There was a flurry of activity in the lower end of the property market towards the end of 2009, as buyers tried to complete on home purchases before the stamp duty holiday ended. According to the BBC, twenty-three per cent more mortgage applications were made in December than in November. It’s likely that deals that should have been completed post-Christmas will have been brought forward to save the buyer paying the 1% tax. This – combined with the snow – has seen the lower end of the housing market get off to a slower start this year. Citywire reports that buyer enquires fell for the first time in 14 months in January.

Inflation v. wage freezes
Inflation rose at its fastest month-on-month rate in December 2009 since records began. Map that to wage freezes, and suddenly affordability is dropping across the UK. Unless the government can combat inflation, there will be a negative impact on the economy. One way to combat inflation is to increase interest rates – a move that could force thousands more homeowners into repossession. For this reason, interest rates will probably remain on hold in 2010 and low in 2011. This means that inflation will play a bigger part in unsettling our fragile recovery as affordability declines.

House prices
Everyone has an opinion on house prices: homeowners are hoping for a recovery; first-time buyers like myself are hoping that they stay low for the time being. As a recent first-time buyer, I was shocked to see that prices in London had started to go up by 0.5% to 1% per month. On further inspection of the market, the price rises are being entirely driven by a lack of supply of new properties, coupled with a decrease in output by home builders. It’s likely that when supply returns to the market, we will see a decrease in house prices.


So, even with all the stabilisers on the UK’s bike, we managed a carefully calculated 0.1% growth. I do not think that the UK will fall back into recession as defined by three consecutive months of decline, but I do believe that the UK will not see growth in Q1 of 2010, and it could be 2011 before we see two consecutive months of growth.



Dave Thomson is Product Manger at Trinity Mirror Digital Recruitment, overseeing sites such as GAAPweb and totallyfinancial. Previously, Dave has worked on technology projects for some of the world’s largest investment banks.

Comments

[DebtMan]

Haha Armer, I do like your analogy better ;)

I believe that a bank that finally decides to take responsibility will not only see there short term issues solved but also set them up for a healthy future.

[Harry]

Concerning your comments on Greek debt, I believe there was a lot of hypocrisy in Germany's reluctance to agree to the EU bailout. Is it not true at the end of the day a weaker Euro is also to the advantage of the big exporters like Germany and makes them more competitive on international markets?

[David]

I agree wholeheartedly with your article. But surely the banks got us in to this financial mess, so shouldn't the banks surely get us out of this mess.
The banks should not be paying themselves any bonus's until they have paid back every penny to the government and tsxpayers thst bailed them out of this crisis.
And they certainly should be doing more to help lending to the smaller business sector instead of penalising them.
And as for the puny, miserable interest on savings accounts no wonder we are in recession and crisis.
If the banks provided more sensible lending to the small business sector then this would help to bring us out of recession quicker.
Money is made to circulate, but if the banks keep it to themselves then the economy suffers.
There needs to be a radical banking industry shakeup enpowered by government reform.

[Armer Associates]

I like the 'stabilisers on a bike' analogy, but I see it more like a car engine patched together with old bean tins and gaffer tape. Other than that I can't agree more... it'll take longer to get out of the recession than the media suggests.

[KrissyG1]

That sounds just about right, the FSA and various heads of bsuiness, including Andy Hornby then CEO of HBOS, all said we were heading into a recession, well over a year ago, and they were right, whilst PM Gordon Brown in the same week told a group of Scottish businessment denied it. (well he would, I suppose).

The FSA and leading economists forecast that the recession would last at least two years, so beware of false prophets telling you it is already over!