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Double Dip - Global Economics Weekly

Double Dip Economics

Global Economics Weekly Brief

Nostalgic readers may remember the ‘double dip’ as the favourite sweetie of the late 1980s. With two flavours of sherbet to dip your lolly into, that double dip was a lot more palatable than the UK economy’s current sour version. A contraction of 0.2%q/q in Q1 puts the UK back in recession. But first estimates are often revised, and it’s where we go from here that matters now.

Sadly, there are few hopes of a rapid pickup in growth on the horizon. Europe is struggling big-time on but Spain’s very fragile banking system is adding to tensions. Meanwhile the US recovery looks like it might be more sluggish than hoped. Inflation and unemployment are disappointingly stubborn and the housing market is still a drag. Whatever you call it, economic recovery is going to be a marathon, not a sprint. How long is a global marathon and will there be enough time to finish so there are winners!

Double–dip trouble. Double dip economics - The UK economy shrank by 0.2% in the first three months of the year, meaning the UK has suffered its first 'double-dip' recession since the 1970s. Four years on the UK economy remains almost 4% smaller than it was at its peak in 2008. To put this in context, even through the Great Depression the UK economy had recovered lost output after three and a half years. Only one sector is spending or producing more now than it was in 2008 - Government and Other Services (when will they learn to live within budget?). It grew by 1.1%y/y in Q1 and is more than 5% larger than in 2008. It's here that economics and politics clearly diverge. The figures show that the recession cannot be pinned directly on lower government spending. Yet it's difficult for the Coalition to defend this because it flies in the face of their policy to reduce it. Do not forget that the Labour government spent, spent, spent and spent with very little or no control!

Government borrowing on track so far
- but there’s harder work to come. Public sector net borrowing was £126bn in the 2011/12 fiscal year, 8% lower than 2010/11. Borrowing forecasts set out in the last two budgets have been very close to the mark – unusual for public sector finance statistics. But it didn’t all go to plan; receipts in 2011/12 were £16bn lower than expected. The numbers show that Government borrowing is falling, but targets will be more difficult to achieve in future. So far most of the improvement has been driven by tax increases (VAT). 90% of spending cuts are still to come. With the UK now in recession Mr Osborne is going to have tougher political challenges ahead too.

UK consumer confidence picked up in March. After a slump in February, Nationwide’s consumer confidence index rose to a nine month high in March, although at 53 it’s still well below the long run average of 76.The breakdown shows that consumers have become more optimistic about the future - especially the economic situation. This is puzzling given the latest GDP figures, but a welcome improvement in sentiment all the same. Credit card spending is rife!

Eurozone private sector activity continues to worsen. The composite Purchasing Managers’ Index (PMI) fell for the third consecutive month in March and at 47.4 remains firmly in the sub-50 contraction territory. The manufacturing index fell significantly too following a worryingly sharp decline in new orders across the whole euro area. The service also sector declined sharply, from 49.2 in March to 47.9 in April. Firms reported reduced headcount and low levels of business confidence for the coming year - quite understandable, especially as the Eurozone economy is expected to shrink in 2012. The Eurozone is running back wards!

The Fed expects US growth to continue to pick up, albeit gradually. The latest Federal Open Market Committee (FOMC) meeting left US monetary policy unchanged, but did note the pickup in inflation and disappointing labour market conditions. The commitment to keeping US rates close to zero until 2014 still stands, but with a little less support and no hint of any further monetary easing. Overall the FOMC thinks that the US recovery will continue and revised up its growth forecasts modestly. GDP is now expected to grow by c2.5% in 2012 and by c3% and c3.5% in the following two years. But just like the rest of the world, the US recovery depends on stability in global financial markets, and this is still at risk from the Eurozone, especially with growing tensions in Spain plus France.

US house prices fell 3.5%y/y in February.
US house prices are still falling, but a glimmer of hope is that they are falling less quickly than they were. Prices fell by 0.8% in the month, less than the 1% fall the previous month. But prices are still around a third lower than at their peak and it’s likely to be some time yet before price growth returns. Foreclosures are still high and even though new home starts are falling, there is a huge pool of supply which needs to be mopped up before things can begin to get better. It’s the opposite case in the UK where a lack of supply, from both possessions and new building, is preventing prices from falling faster. Plus, more unemployment on its way again!

The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland
followed by France who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? What future as the Euro? Watch this space!

Plus, the banks are stashing cash at the highest levels ever recorded, why? We all know why, don`t we!

What `all` European countries need to understand is about how to operate within financial budgets, please click on the image below;

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Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.

Double Dip, the economics of it all for the economy.

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