Economists rain on positive OECD UK results

8 February 2010 | By Lee Jones

Economists have played down the Organisation of Economic Co-Operation and Development’s glowing report on the future of the UK economy.

The OECD’s leading indicator for the UK, which is calculated by assessing the performance of the FTSE non-financial index, three-month interest rates, production forecasts, economic confidence meters and car sales, rose to its highest level since 1973. The UK indicator rose to 105.9 in December 2009, up 11.5 points on November.

This is one of the highest points for the indicator in 40 years, which has historically been successful in predicting GDP movement.

But Simon Johnson, a former director of the International Monetary Fund, says investors will soon look unfavourably on gilts as fears surrounding the UK’s growing debt problem materialise in the markets.

Johnson says: “Worries about government debt and associated public sector liabilities because banking systems are in deep trouble, have spread through the Eurozone to Spain and Portugal. Ireland and Italy are next up for hostile reconsideration by the markets, and the UK may not be far behind.”

Charles Stanley director of private client research Jeremy Batstone-Carr says the positive OECD data may be an anomaly. He says a sluggish 2010 housing market, coupled with an end to the bull market and weak Sterling means it is unlikely that GDP will pick up as quickly as the OECD data might suggest.

He says: “The strong suspicion is that the leading indicator is about to ‘roll over’. The year has started with the euro under pressure in the wake of mounting concerns regarding sovereign debt levels in Greece and rising concerns regarding Spain amongst other peripheral Eurozone countries.

“Sterling may struggle, particularly if the election result delivers a hung parliament and policy paralysis. Were prevailing themes to be maintained though, it clearly augurs in favour of buying UK based companies with greater US exposure to those with greater European exposure. Pass the ouzo…and a revolver!”