Will There Be A 'Double Dip'?

Of the many questions that face us as we go into 2010, perhaps the most serious is, 'Will there be a double dip?'

It takes a moment to work out what that means, but effectively the climb out of recession is merely a false dawn and we lurch back into recession for another period before finally emerging into real growth. Of course, this would be a huge disappointment to the Government as we have already had the deepest and longest recession on record, so as we clamber up the sides of the slippery slope to growth, it could be disastrous if we slither back down - at least for their re-election chances it would be.

Just today we heard that the rate of growth in house prices has slowed. I actually think this is not such bad news - the return to economic growth would be far more healthy if it was not led by or dependent on house prices. However, there are more serious issues that we face.

Firstly, £200bn of Quantitative Easing (QE) is soon to end - where we have issued new, 'funny money' to buy our own debt. Pretty soon Government bonds will have to vie for real money buyers and that will be a crucial test of Britain's economic health in the eyes of others. The best that QE has done is to ease credit conditions but in reality it has been stored by banks to shore up their capital ratios and some have used it to play the markets again with devastatingly profitable effect. Little has got into the real economy and allowed people like us to get access to credit more freely - or businesses for that matter.

This lack of credit is still an issue. Today, as the recession lingers, businesses have not made big demands on banks for credit - not for growth or investment, at least. Most businesses have reined in costs and tried to decrease dependence on credit, hoping they will get good, easy access to money when the markets recover. That could be a real issue as not only will firms be making their demands at roughly the same time but it will be a crucial test once again of whether QE has worked. Many suspect this will be a tough time for businesses and impair the country's ability to recover and grow.

More importantly, around the same time, as thousands of businesses took the opportunity to defer the payment of tax bills, there will be cash demands on them. By taking up the Government's initiative on 'Time to pay', firms have kept vital cash in the business at a key time rather than have to borrow more to pay their tax bills or for that matter have to make deeper cuts. However, it does not mean that they do not pay their taxes, it merely gave them a stay of execution. The taxman will want his money soon enough. Once again, this will all happen at roughly the same time and companies will have to find the cash at a time when they most need it to grow and take advantage of the recovery. Again, it jeopardises the tenuous period of growth we have.

Similarly, there will be chaos for firms on 1 January as the VAT returns to its old rate. Those firms having their year end on 31 December will have a dilemma as they would normally bill all they can. If they are a distributor, then their customers who sell on to end users may fear receiving an invoice before 31 Dec if they cannot immediately bill the goods - so 'goods in transit' or 'shipped from factory' situations will be areas of uncertainty as the chain of invoices for VAT purposes may have differing VAT rates. While the situation may be clear in some accountants' eyes, I can tell you very large firms are very fearful of the lack of clarity issued by HMRC on the subject. For many firms, who operate on incredibly thin margins, if they are left holding the VAT difference, it could wipe out some or all of their profit on a transaction.

Out in the world of consumers, there is the issue of deferred payments on mortgages. On paper, it was a good idea, but the problem is always about the detail and the time for returning to payment is a real issue. At some point, despite over 1m new claimants on the dole, people will have to start paying again which will make less available to spend in the high street, particularly if house prices have not regained sufficient value as to wipe out the negative equity many are suffering.

Clearly, there are many things to be negotiated in the coming year and some of them have the potential to drag as back into recession. The biggest of them all will be when the Government finally faces up to the inevitable cost cutting it will have to make in the Public Sector. Over the last 12 years, an extra million jobs have been added to the Public Sector as well as all the outsourced contracts. As many as one in four jobs are associated with the Public Sector and it is anticipated that the Government will have to cut back so far as to regain all of the incremental spending it has made over the last 12 years - that is the stark reality we face. A simple argument can be made that all of those 1 million extra jobs created out of nowhere in the Public Sector simply to support bureaucracy and red tape and creating untold inefficiency on inefficiency will have to be lost. It not be that many but there will be big job losses in the Public Sector for sure - that's more people claiming on the Welfare State and less paying tax; the double whammy that keeps knocking the Government estimates on borrowing off line. This, of all factors, has the biggest potential to hit us as it not only puts a huge strain on the system, it also throttles the business of those dependent on the Government for a portion of their profits but most of all it means that our ability to service our national debt is less certain - and this has a corresponding repercussion on the credit rating of the country which affects the price and attractiveness of our Bonds.

It will be a tough year still for businesses and a tough year for Government. If we are to avoid the double dip, it will take businesses to lead us and the Government to ensure there is credit available when needed most. None of that is really certain at this stage.