Back in 2009 I coined a phrase on the radio: “The long middle”. It referred to my view that the UK economy would not bounce back strongly from recession. I thought it would take many years for any meaningful recovery to come.
Four years on and it is clear to me the picture has changed very little. At a recent seminar with Richard Jeffrey, Cazenove’s chief investment officer, I found he shares my views.
Richard Jeffrey’s forecast is for sub-trend growth to continue in the UK, US and Europe for a number of years. In the UK this means annual GDP growth of around 1.5 per cent, in the US 2.5 per cent, and for Europe, excluding the southern Mediterranean countries, around 1.5 per cent as well. The problem is that we have grown used to an economy growing at 3 per cent a year – an economy growing at less than half of this feels weak.
Richard Jeffrey raises the valid point that the media could actually be making things worse. The opposition has naturally seized upon the concept of a double-dip recession, though I think it is probably more a case of growth stagnating, meandering between positive and negative periods influenced by temporary factors such as the Olympics. Like me, Richard Jeffrey is somewhat sceptical of the Office for National Statistics’ first estimates of UK GDP data. He explains that going back 20 years, the average revision to the first quarterly estimate of year-on-year growth has been over 0.7 per cent. Furthermore, out of 82 first quarterly estimates going back to 1992 some 34 revisions have been 1 per cent or higher. On only 16 occasions out of 82 was the first estimate revised downwards.
Bearing in mind the media makes a big deal of this first estimate, we would probably be better to delay publication and await the second estimate, which becomes considerably more accurate. This is important because business and consumer behaviour could be led by this first estimate. Anything that puts consumers off spending, or stops businesses investing, is hardly great for the economy if it paints a false picture.
It is entirely possible, therefore, that we have not had a double dip at all. As many people have pointed out, jobs data has been very strong, and this is at odds with the GDP readings. The UK private sector created 600,000 jobs in the year to June; not indicative of a setback in the economy. I’m not suggesting we are off to the races, but things could be better than the media presently portray.
So how do we interpret all this? To me, it suggests shorter, more fragile business and economic cycles for the UK, highly changeable conditions, and a tightrope walk between growth and recession. If economic growth is only at 1 per cent to 1.5 per cent, a sudden shock could easily plunge us into recession. In terms of consequences for markets, Jeffrey’s view is eventually the euro will fail. This is partly political, because the southern Mediterranean countries need to continually cut the cost of labour, which induces a deflationary spiral as we are already seeing in Greece. The pinch point, though, is not Greece but France, whose banking system has the largest exposure to southern Mediterranean countries. At some point we will see whether Germany really will stand behind the entire euro zone.
For stockmarkets, perhaps counter-intuitively, this would appear to leave the FTSE on a reasonable valuation, with possibly with more upside for cyclical stocks as Richard Jeffrey believes GDP will be around 1.5 per cent for the UK next year.
The US looks the most expensive market with the cheapest stocks in Europe and, as usual, Japan. Finally, in emerging markets, the major economies of China, India, Brazil and Russia have had a tough time, but market valuations are starting to look attractive versus historic trends. In summary, whilst the economic outlook is poor, it is perhaps not as bad as much of the media and the opposition would have you believe. With central banks maintaining very loose monetary policy equities could just surprise on the upside – despite the gloom.
Mark Dampier is head of research at Hargreaves Lansdown