The unions are threatening a general strike at the end of November and Moody’s just downgraded the credit rating of 12 UK financial institutions. Revised data on growth showed a mere 0.1% advance in real GDP in Q2 with private consumption down 0.8% from a year earlier. Measures of consumer confidence are not much higher than where they dropped to during the crash of September 2008.
Whether this pessimism is justified or not depends. It’s never that clear cut. On the bright side, the UK is doing better than most of the rest of Europe, being ahead of the game in terms of fiscal stabilisation and enjoying the lowest interest rate environment ever.
Growth is still positive and it was encouraging to see the September CIPS (Chartered Institute of Purchasing and Supply) surveys of current economic activity posting readings of 51.1 for manufacturing and 52.9 for non-manufacturing. Growth: weak but just positive.
But perhaps that is reason enough to be pessimistic. Given the fiscal stimulus that was provided to the economy in 2009 and the mass of liquidity that has been provided since, the economy is barely managing to post any growth and the level of GDP is still below that of the peak of the last business cycle.
Unemployment is stuck up around 8%, there continues to be news of job layoffs and bank lending and the housing market is moribund.
Elsewhere, the introduction of another £75bn of QE by the Bank of England needs to be viewed in the context of the global situation.
The Fed announced Operation Twist last month and the ECB – on the occasion of Jean-Claude Trichet’s last meeting as President of the Governing Council – announced additional liquidity provision measures designed to keep the European markets functioning through to the year end.
With slightly better global data (ISM in the US better in September) and some more positive news coming out of Europe regarding Greece and a possible comprehensive bank recapitalisation plan, there does seem to be a more positive mood in the markets. This is not necessarily reflecting in key market prices yet but there does seem to be more scope for a year-end relief rally than there has been for some time.
Having said that, the mood is fragile and subject to turning much more negative again. When a leading official at the IMF suggests the world is only a few weeks away from a financial meltdown, one would be forgiven for being pessimistic!