Threat of double dip and sterling woes give Mervyn King sleepless nights

Posted on: 26 August 2010 by Gareth Hargreaves

Concern the global economy will slip into another recession have increased following sobering economic news from the US and renewed fears over European government debt.

Sadly my economic musings of the past couple of weeks seem to be coming true. The world economies are not upwardly mobile and nasty news in coming out of America: the jobs market is slowing; new house builds are low – and house sales are even worse. US consumers aren’t consuming. All in all the trillions of dollars that President Barack Obama and the Federal Reserve pumped in to their economy has had little long term effect.

In spite of the positive spin that governments have been trotting out to boost consumer confidence, pundits are now warming the markets to the very real risk of a double dip recession!

This side of the Atlantic, things aren’t that much better for the EU. Ireland is having a hell of a time raising money from the sale of government bonds after Standard and Poor's  (the ratings agency) downgraded the Republic’s credit rating. In the wider Euro zone concerns over financial plight of Greece have resurfaced, and the expected growth in other EU countries has stalled.

On the home front the news is both good and bad! From an overseas investor's point of view the UK and the pound are safe havens for their money. They like what Cameron and Osborne are doing in terms of cutting debt and reducing spending. Sales in the High Street are okay, but that is mainly due to price cutting by retailers. Exports are doing well now sterling has settled at $1.55 to the pound.

The future, however, is still gloomy. Inflation figures are causing Mervyn King (Governor of the Bank of England) sleepless nights. We could see inflation running at 10% if he’s not careful and this will add pressure on interest rates and sterling. To rub salt into the already pretty raw wounds our banks are still feathering their own nests and balance sheets and not lending to SME’s. The impact of this policy means small businesses are not expanding and as a consequence not creating the new jobs we so desperately need.

As noxious as the behaviour of the banking sector is, it represents only a sideshow when you consider how will we fare once the massive government cuts start to take effect. Will the underlying growth in the business sector start to create the wealth that will permeate through the economy and balance out the cuts? Will we see new jobs created to offset the rise in unemployment?

I sure there will be some upswing but I don’t think it will counter the cuts. We are in for a rough time but not as bad as some countries that didn't have the courage to make the changes necessary to get their economies moving.
Unemployment in the UK will more than likely come close to reaching three million before it starts dropping. When it does, the fall will be rapid and we will truly be on the road to recovery. An optimistic estimate for this would be 2013 peaking in 2015! Until then it’s more of the same – this is price we must pay for our own overindulgence in the Blair/Brown’s Boom years.

So my message today is: Hold your purse tight, shop for bargains (there will be plenty out there!) and stay fit, because one thing is for sure, when times are tough the kids will always return to the ‘Bank of Mum and Dad’!

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