The Bewilderness

Double dip recession for UK when real finances return

Services are expected to start growing from May, with many economists heralding that the worse of the recession is over. This is cited as evidence that government policies has proactively helped to end the recession by priming the pump. As an aside, it may be the signal that the government is looking for to take an early election, pretending that expenses are now dealt with and that they should be judged on their record.

What has happened to the debt overhang or the credit crunch? They have not gone away.

Separately however EEF, the manufacturing organisation, said that an increasing number of manufacturers were reporting a rise in the cost of borrowing. It urged the Bank of England's Monetary Policy Committee, which is expected to hold interest rates at 0.5pc on Thursday to continue to pump new money into the economy to prevent higher borrowing costs from weakening recovery.

The survey by EEF also found that almost 70pc of companies reported a withdrawal or reduction in access to credit insurance over the last two months.

The shift of liabilities on to the government's cooked books has not eliminated the need to undergo the pain of writing down debt that cannot be paid. Any growth which is only sustainable through further injections of fiat money is a dead cat's bounce, and an addiction that government cannot continue to finance. What would have been deep and swift will now be prolonged and worse. Thanks, Brown! 

Fiscal galvanism and Brown's path to catastrophe

There is some crap being pulled by the authorities, as a general consensus of confidence building results in a 'green shoots' rhetoric that comes nowhere near the reality. The decline may be slowing, but such a gluttony of debt, an orgy of red, as devised by our political classes under the lie of fiscal stimulus. It is the last gasp of a failed model; an elite, beholden to a economic model that derived value from the rise in price, tries one last heave to stimulate the debt laden corpse, and this galvanic twitch is mistaken for growth.

We are so far down the route that it is not possible to create a bubble. Slowing the rate of economic decline is the bubble. This is unsustainable, and we are facing a new crisis: in the first quarter, consumer credit became a credit, as the population repaid more than they borrowed. Seasonally adjusted, it is a minimal amount and a tenth of what was borrowed at the height at the boom. The liabilities grew smartly up to 2008 and we do not have the 2009 data to conjure.

So, we have an illusion of remediation, but loans are almost non-existent and liabilities, those are quantified, are increasing, or have plateaued.

We can conclude that 2009 is the year of fiscal galvanism. The catastrophist school remains a wiser bet as the economy died last autumn.

The illusionary stimulus of Labour

The true interest rate that we are facing has been calculated in a Telegraph article. Whereas the nominal rate as decided by the Bank of England is 0.5%, based on a stated policy of deflation, the real rates are overwhlemingly negative:

JP Morgan's chief UK economist Malcolm Barr has calculated that every extra £25bn in quantitative easing is equivalent to an around 0.6pc point cut in interest rates.

"The MPC has decided to implement £125bn by the end of July, which suggests that QE announced thus far is equivalent to a reduction in rates of around 300bp, and the effective policy rate including QE, will be -2.5pc as the asset purchases are completed in late July, rather than 0.5pc," he said.

The calculation may come as a surprise to many families and businesses, which are still paying high interest rates on their new and existing loans. However, this is largely because the financial crisis and credit crunch have driven lenders to push their own rates higher as they attempt to rebuild their balance sheets.

From this calculation, the government and the Bank of England have colluded in pumping liquidity into the economy on the stated grounds of averting deflation. Labour have an additional political interest in softening the downturn so that they can take credit for 'saving the economy'. Liam Halligan has pointed out that there is little evidence of a deflationary threat:

But now, just three months later, this looming threat has apparently passed. It warrants not a mention in the Bank's Inflation Report. Has deflation really gone away? Or did we never actually face such dangers? Was the spectre of deflation conjured up, instead, for other reasons – as an excuse for this ghastly Government to yank monetary policy back off the Bank and nail interest rates to the floor, while junking fiscal caution and borrowing in a fashion more akin to a banana republic?

The Bank of England has stopped warning of deflation because it is no longer credible to do so. In truth, it never was. CPI inflation remains at 2.9pc – way above the Bank's target, as it has been for 31 of the last 33 months. As sterling has fallen, import prices have surged. In an open economy like the UK, that's highly inflationary.

This is an inflationary strategy that segues with Labour's political aims. An unsustainable short-term policy is undertaken to ensure electoral victory in May 2010. Stagflation, or its new severe coinage, slumpflation is now the key danger.

The combination of a huge budget deficit with quantitative easing also casts very strong doubt whether any growth caused by this liquidity is sustainable. Actually, it isn't. So, once the stimulus falls away or ceases under crisis conditions, we will enter the second dip.  

Economy in zombie lights

There are some indicators flashing that the current drop in manufacturing output has ended. Some are even speculating that this demonstrated that the bottom was reached in March and that the economy will start to grow from the first quarter. Wags will note that the growth of 1.6% increase in the printing and publishing sector as been caused by the growth of paperwork under this govenment.

It would not be easy to distinguish between genuine growth and the twitching of a zombie corpse, suspended from recession, by a huge increase in government borrowing and expansion of money supply. Responding to demand via exports rather than imports would be key:

Other figures published by the ONS today showed the UK's deficit on trade in goods and services narrowed to £2.5bn in March from £2.8bn in February. The shrinking gap was driven by a drop in imports, not a rise in exports. Imports have fallen in volume by about 16pc over the last year, but economists say sterling's relative weakness will boost exports once the global economy starts to pick up..

Deficit to be tested to destruction

The newspapers have been calling the bottom for about a month now as the speed of the decline was so swift over the last six months. The OECD leading indicators have shifted from 'strong slowdown' to 'possible trough' (reaching certainty in Parliament) in Britain, France and Italy though all other countries are still in the midst of the downturn.

Mustered into this calculation is the large expansion of money supply and deficit spending that has delayed the reckoning with bad debt. In the midst of a bad recession, the government has, through a superheroic effort, managed to squeeze some economic growth out: leading to the real possibility of a double dip in the downturn. Growth, as yet, is unsustainable.

China's concerns that quantitative easing and deficit spending will be tested, perhaps to destruction. The Bank of England and Brown's deficit leave us on the frontline, when the money runs out..

Darling's fantasy, Europe attacks

The European Commission questions the economic forecasts of the Chancellor, presenting a far worse set of figures:

The Commission said that "the likelihood that economic activity in 2010 will be weaker than envisaged by the UK authorities" will compound a "very significant" deterioration in public finances.

It expects UK unemployment to rise to 9.4pc by 2010 leaving 3m workers jobless.

"The UK economy is now clearly experiencing one of its worst recessions in recent history," the EC said. It expects GDP to decline 3.8pc this year and projected that growth will remain negative for the first three quarters of 2009 followed by two quarters of "virtual stagnation and only a gradual return to slight positive growth by late 2010".

Did they factor in the damage they will do with their continued regulation of the financial sector, Britain's economic specialism, and the increase in the cost of capital for all of the Continent. A sustained economic attack on one member can only result in our detachment, if we have a Eurosceptic Tory government. Is that what they want?

When will the global bear growl next?

Are we in a depression, great, little, moderate or extreme? The latest raft of statistics do little more than chart this unknown territory as the speed of this transition phase, globalised and harsh, is beginning to moderate. Just as the haste of the downturn eases, this is hailed as the 'green shoots of recovery' by the political class. Their optimism is fuelled by a need to bolster their poll ratings and a feelgood message is squandered for short-term gain. Like all market calls, political reinforcement of genuine growth can prove a symbolic engine of confidence, but this requires an equal blade of realism when recession is underway.

The developments continue to look bleak: UK wages collapse at fastest rate in 60 years and Germany contracts at a forecast rate of 6%.

There are two concerns that are of deep concern. One is the lack of writedowns for the debt overhang; a concern that the bank nationalisations have done little to address. Secondly, the European Central Bank is behind the curve in its response, a slow policy with dire consequences for its members and Eastern Europe.

More crises are coming and we should beware of the political call, one that signals the continuation, not the end of this glabal bear.

Inflating prices, deflating wealth and a perfect storm

We will hear a Scot stand up tomorrow and attempt to row a canoe against a tidal wave. He will not succeed, because this government has set out policies and presentation that bears no relation to reality. After the lies of last autumn: the lies that we no longer hear, the government is best placed to deal with the recession due to their wise management, and this lack of growth is imported from the United States. Yet, the import of our grave situation has still not struck home as we have not yet faced the crisis, the crisis of public expenditure hitting the wall.

There is no use quantifying the liabilities that the British taxpayer faces, though neither Labour nor the unions have realised that their period of dominance is at an end. They are spending as if there is no 2011, preferring to keep the boat sailing until past the election. They cite the dangers of deflation, drive interest rates towards zero and deploy a huge expansion of the money supply through quantitative easing. They are unable to face withdrawal from their tax paid goodies.

Who will pay? Us. The jaws of a vicious trap await: the retail price index enters negative territory, linking all pensions, wages and benefits to a paltry rise or a decrease; yet consumer living costs are rising due to the fall in sterling and said expansion in the money supply. The outcome is a severe contraction in living standards for both the employed and the unemployed.

We have yet to face our perfect storm: inflation, falling living standards and a gilt strike, crystallising the misery faced by the country. Then Labour will pay...

The new normal is political risk

Ian David, McKinsey's Worldwide Managing Director, has written on the new norms that will invest business practice once the current crisis is over. From a more commercial perspective, David paints a landscape of less leverage and greater innovation, as companies are forced to innovate for greater productivity as financial wizardry is no longer able to provide the returns that investors have become used to. This landscape will exist, no matter how the crisis plays out.

Despite identifying political risk as a rising anxiety for business, David does not clearly delineate that we face a new political order, as the economic structure, its rules and principles, have not changed. An axis favouring market forces, lower taxes and non-intervention is better than government regulation and prescribed capital allocation. The risks of catastrophically bad policies are not just limited to Asia, as David writes; they are applicable to the West:

The big unknown is whether the temptation to blame Western-style capitalism for current troubles will lead to backlash and self-destructive policies. If this can be avoided, the world’s economic center of gravity will continue to shift eastward.

Now that the G20 summit has passed, the temptation of the political classes to act has proved the defining feature of this crisis. From history, we know that politics worsened capitalism's ability to deal with the problems arising from Depression. This heightened political risk has begun with the dilution of independent standards for a political smokescreen.

Depression gatecrushes UK industrial production

The UK February figures for industrila production were absolutely horrendous. Looking at the breakdown, the decline spans all sectors of manufacturing, though the worse is concentrated in transport, machinery and metals. On an annualised rate of decline, we are facing falls of 12.2%, an unprecedented figure. On these statistics, the downturn has worsened and continues to take its toll, responding to the depression in trade.

The only figures moving upwards at the moment are food prices: a trend that the government could remedy by opting out of the Common Agricultural Policy..