As reported this week by the BBC, and confirmed by the Bank of England Governor, Mervyn King, the UK's economy suffered a shock contraction of 0.5% in the last three months of 2010, figures have shown.The figures are set to raise concerns over prospects for the economy, with large public spending cuts expected to come in this year.
The contraction follows four straight quarters of growth, and took most economists by surprise – but not Roger Martin-Fagg, Vistage’s Economist at large...
We asked Roger to comment on the recent news...
”I am glad that Mervyn King has joined me in thinking that this year will see a double-dip. I of course cannot forecast the weather, but even without the December snow, the fourth quarter would have posted zero growth. So looking ahead. The first quarter will show positive growth at about 0.2, but Q2 and Q3 will be negative which means the UK will officially be in recession again. This is entirely predictable given the decline in real incomes which will accelerate as we go through the year. Many more UK households will experience end of the month cash shortages and cut their spend on discretionary items. There is no chance that base rate will rise this year, at existing rates credit is barely growing. As I have said, and Mr King confirmed, a rise in rates would do nothing to reduce UK inflation this year.”
Vistage members have the benefit of frequent updates from Roger, all presented in a practical way and applicable to businesses and CEOs. Here’s an extract from Roger’s most recent update (published well before the recent recession figures were announced). As you will see, Roger forecast a double-dip…
Roger’s comments:
“I am almost a lone voice forecasting another mild recession in Q2 and Q3. Here is my argument.
2010 was a better year than most expected, including me. The outturn was stronger because households decided to live beyond their means (yet again). The savings ratio fell sharply as households decided that as according to the press their house was rising in price, things were on the up, and there was no need to reduce debt further. Households with no debt, I think basically said “sod it, why keep it in a bank earning virtually nothing, when it can be spent on all the bargains offered by retailers”. The velocity of money grew at its fastest rate since 1993.
The price of oil is now $100 a barrel. This will really squeeze discretionary incomes if it stays close to this level. Anyone who has filled their heating oil tank (2.5k litres) in the past 3 weeks will have noticed they are paying £1000 more than in March 2010. And the price of wheat has doubled in 2010 which will add to food price inflation which is running at 6%. RPI is 4.7% due to the cost of imports.
The chart below compares my forecast with that of the Office for Budget Responsibility, for real disposable income (income after tax).”
“As you can see, I am much more pessimistic. This is because Average Weekly Earnings are growing at 2.2%, the public sector has a wage freeze, and RPI is nearly 5%. Of course if you are on the board of a FT100 company, your earnings will be up 55% (mostly triggered by share price increases).
Consumption spending is 80% of total spending, so the following chart reflects the one above. The OBR are assuming that private investment spending will be stronger than I think it will be. Although in my forecast investment spending prevents 2011 as a whole being a negative year.”
