UK Economy Slows Down

Rob Mackrill - Thu 14 Feb, 2008

Economists scurried to boot up their spreadsheets. Maybe not 4.5% rates by year’s end....maybe 4.75% by March 2009..? Like a tightrope walker Merv the Swerve is trying to steer the UK economy along the fast thinning wire of non-inflationary continuous growth.

St. Valentine’s Day ( more about this below...)

Dear Subscriber,

A “stag”... Outside the Scottish Highlands, it used to mean a speculator buying up shares in a new issue and then selling for a fast profit.

A stag now is more likely to be shorthand for stag-nant - as in economic growth coming to a standstill. And it’s more likely to be jammed on to the word inflation and edited down to make stagflation. Stagnant growth with inflation.

It’s a course the good ship UK Economy is steering towards...well possibly. It’s not the most likely event says the Bank of England’s downbeat inflation report. The lowdown on the slowdown is that growth, as we know, will slow sharply this year. Expect 2% - well down on 3% last year but, though UK demand will ease up, inflation won’t. Food, fuel and a devalued pound could see it bust through its upper limit of 3% by mid-year thinks the Bank. Bloated house prices could be flat for years.

Economists scurried to boot up their spreadsheets. Maybe not 4.5% rates by year’s end....maybe 4.75% by March 2009..? Like a tightrope walker Merv the Swerve is trying to steer the UK economy along the fast thinning wire of non-inflationary continuous growth. Nice. But it’s not getting any easier as the governor acknowledges: “This will be a more difficult and challenging period than we have seen in the past.” Not so nice.

So that’s the central forecast. There are other scenarios. Things could get a lot worse. The economy could slip out of low forward gear all together and hit reverse. It could start contracting. In the words of Ryanair CEO Michael O’Leary “a good, deep bloody recession” is possible. Or in more opaque central banker speak it is “perfectly consistent with something not very far off our central projection”.

Not much for the optimists there. The City is gloomy, but manufacturing businesses should benefit. Lower interest rates and a weaker pound should boost export sales and with luck, hack away at the towering UK current account deficit, approaching the 6% of GDP mark last time we checked. Or in econo speak, effect a ‘rebalancing’ of the economy (i.e. try to import as much as you export, in both things you can see and touch, and those items which pass at the click of a mouse).

Here’s hoping Mr King is doing everything possible to under-promise and over-deliver...

*** The banks may be bleeding but benefits and bonuses aren’t. Goldman Sachs has rewarded employees by adding “sex reassignment surgery” to its healthcare plan...

And a survey by head hunters Morgan Mckinley, finds 70% of City workers earning between £18-150,000 enjoyed bonuses that matched the previous year and more than a third got more.

Once again, where are all the customer’s yachts?

Regards

Rob Mackrill
The Daily Reckoning UK