Today’s figures for the UK economy are predicted to be bad again – some economists predict a return to recession to create an unprecedented ‘triple dip’. However at the same time the world markets are on the up – which appears to indicate that there is something wrong with the UK.
UK Government Resolute
In the face of more bad news the UK government and the Chancellor George Osborne are standing firm on their policy of continuing austerity. However in a recent speech Olivier Blanchard of the IMF sent a clear message to the UK government that it was time to review their austerity measures as it appears they are not working.
It all seems very logical and politicians over the years have used the analogy of the housewife balancing the housekeeping – that is far too simplistic, the economy of a country is far more complicated. It is more complicated than a business – but I prefer that analogy – if a business cuts and cuts and fails to invest in the future every manager knows that it will become uncompetitive.
The Growth Factor
All of the good honourable ambitions to cut down debt and balance the books are irrelevant if there is no growth or worse still recession. A healthy economy is one that is growing at comfortable rate, say 2-3% this allows time to reduce the problem of debt over time.
However the bogey man of inflation is always presented and warned against – yes if there is too much growth there are pressures on inflation – again we can relate this to the business ‘overtrading’. However this awareness and caution about inflation can be irrelevant – as inflationary pressures can be beyond our control and coupled with lack of growth an economy can suffer from the recently recognised phenomenon of ‘stagflation’.
So lack of growth is the real problem and after a prolonged period of recession and poor performance there is only one approach – to adopt Keynes’ and start investing in the economy.
So why at this time are the world markets so strong? Well investors have not political dogma and they need to get a return on their capital – and at the end of the day they all know that there is only one way to do this – invest in real companies that are involved in wealth creation. It is risky – but the rewards are potentially great, all of the wealthiest people have grown that way not just from their labour – but from the equity value, the future value of their businesses by investing in the markets.
This does not answer the question ‘Why now?’ – well markets are not wholly rational – there is some sentiment. We are starting a new year, if you look at the shares now that the risk of collapse has gone – well the only way is up, so there buying opportunities and undoubtedly some will yield double digit returns.
The other thing is the sentiment actually drives the markets – so positive actions can lead to the anticipated growth – so perhaps it is about time the austerity and glum faces were put away and the UK started showing some confidence in the future.
One of the worst excesses of the austerity measures is that inevitably the burden falls on the least able as they cannot escape the cuts in welfare and low wages. Yet actually these are part of the engine of growth – any money from the government invested here is immediately put into the economy -where as tax cuts to incentivise the wealthy are as likely to be spent outside the UK economy.
Like the IMF I think it is about time we started investing in the UK rather than waiting for the private sector to save the economy – once the government starts spending and there are signs of growth private money will follow – but it is unlikely to be the stimulus that we need to see green shoots in the Spring.