ITEM Club: Recession only just avoided - Not quite (update)

Ernst & Yount's ITEM Club has come up with some gloomy figures in its Spring 2012 forecast. For those without time to read the full assessments, the executive summary reads:

"A UK recession may have been averted, but this year’s growth is likely to be lower than last year’s depressing 0.7%. The ITEM Club’s forecast sees growth at just 0.4% in 2012 and not returning to trend until 2014.

"Central bankers have again saved the day with their unconventional monetary policies. The ECB’s LTROs have bought more time for the euro, while in the US and the UK, QE2 has turned investor sentiment from ‘risk off’ to ‘risk on’. Central banks have now poured trillions of dollars and euros and a quarter of a trillion pounds into the markets to help their economies get out of recession. They cannot do much more to stimulate growth for fear of reigniting inflation, but they are there in the background if a new crisis emerges.

"Business spending has picked up nicely in the US, but UK plcs remain extremely reluctant to invest despite this proven ability of central banks to eliminate tail risk. The growth in UK business investment this year is likely to be similar to last year’s paltry 1.2%, leaving it 12% below its 2008 level. Consequently, the economy is bleeding cash into company coffers at an alarming rate.

"This haemorrhage is sapping the strength of the economy, keeping it on the critical list. Although the forecast sees business investment growing by 6% next year and a further 10% in 2014, this will not be sufficient to get the economy moving rapidly. The company sector financial surplus moves up from 5.2% of GDP in 2011 to 5.7% in 2014."

That's the macro-economic view from a source with a good reputation... but what do conditions feel like where you are? The first quarter was tough, but our internet-based business is actually slightly ahead of 2010. If we'd been in traditional retail/manufacturing I suspect the picture might have been a little bleaker. As regards cash within the business, it's certainly not as tight as it was two years ago. Even though we're hardly swimming in the stuff, where there opportunities for growth there is scope to invest - but there has to be a very solid business case for doing so.

Given recent developments in the professional publishing market, I'm currently working on one to ramp up AccountingWEB's content activity!
 

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ITEM missed the mark...

John Stokdyk | | Permalink

It's only a matter of a few tenths of a percent, but the E&Y forecast has been holed by figures from the Office of National Statistics today showing that the contracted 0.2% in the first quarter of the year, according to the latest Office of National Statistics(ONS) figures.

This follows a 0.3% decline in the final quarter of 2011 and means by the official benchmark that the UK is  in recession again - the country's first double-dip since the 1970s.

The economic slump was led by a 3% decline in in construction output - the biggest fall for three years. The ONS added that a fall in public sector investment had contributed to the large fall in the construction sector.

In addition, output of the production industries decreased by 0.4% and output of the service sector increased by 0.1%.

KPMG chief economist, Andrew Smith commented on the data: “Output remains broadly unchanged from its level in the third quarter of 2010 and, four years on from its pre-recession peak is still some 4% down– making this slump longer than the 1930s Depression.”

Further comments from accountants follow below.

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View from the British Retail Consortium

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The Chancellor is determined to continue with his Plan A to address the government budget deficit during this parliament, but his stance is being called into question by numerous business groups, including he the British Retail Consortium (BRC).

 The BRC has previously warned that temporary bright spots, such as last month’s retail sales figures, cannot disguise the fundamental difficulties faced by households and businesses.

 With inflation growing at almost three times the rate of average wage increases and personal budgets under pressure from high fuel and utility bills, consumers have continued to cut back on many areas of spending.

 BRC director general Stephen Robertson commented: “Whether GDP growth is just above or just below zero doesn’t change the harsh realities facing customers but it will undermine confidence at a time when we desperately need to be going forward not backwards.

 “Consumers are struggling to balance their budgets. We won’t see a convincing revival until real wage growth returns but last month’s increase in inflation suggests the squeeze on disposable incomes will continue.

 “If it’s to rekindle recovery the Government must deliver a credible growth strategy. It should halt its tsunami of destructive new regulations and taxes. They are adding costs to individuals and households and can only prolong this new recession.”

 

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UK200Group comments

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The UK200Group of accountancy and law firms issued the following comments from three of its members:

 

Jonathan Russell, partner, ReesRussell

“The drop in construction is surprising, as many small builders are now seeing order books filling up again, but many large scale projects – such as the Olympics – are nearing completion and with fewer large scale projects starting, this may well be the cause. The good news is that many of these large projects are run by overseas companies and not all the lost revenue will hit UK’s bottom line. 

“The need for growth remains, to enable the government to balance its books. Increases in manufacturing, much in the motor industry, must be a pleasing sight but it is worrying that Germany’s manufacturing sector seems to be stalling. 2012 will remain a difficult year for businesses and with growth still only on the horizon, managing expenditure may well remain a priority."

 

Richard McNeilly, partner Dains

“In practical terms, it makes very little difference if we suffer a double dip or show modest growth but I’m afraid that this news will go some way to undermining business and consumer confidence, which is key to the recovery.

“I don’t believe that there are any quick fixes – the recovery is likely to be slow and painful but I remain encouraged by some of the recent actions taken to stimulate long-term growth. We are now seeing Regional Growth Funds in action, the corporate tax environment in the UK improving and innovation being rewarded with grants awarded by the Technology Strategy Board and tax stimulus in the form of the Patent Box.”

 

David Ingall, JWPCreers

“However you look at it, it is all about confidence. One major problem is our neighbours across the channel and their refusal to accept that they have to resolve the issues surrounding their currency.

“The imbalance of trade within the Euro, with Germany taking advantage of the discounted Euro exchange rate but refusing to transfer that benefit throughout the eurozone, means that there is an inherent instability within the group. Until that issue is tackled there can be no confidence as there will always be the fear that there will be another crisis.

“The 0.2 per cent shrinkage is only a statistic. We have to keep on going – there is no choice.”

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