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.

Green Shoots And Leaves?

An article on the web this morning tells us that bank trading volumes are up for the first time in two years, giving some clear signs of a recovery. It does point out that pensions and life insurance products still remain depressed, which I would argue are the better long term indicators, but the point is taken.

However, a cursory glance at the familiar barometer of the employment situation, The Sunday Times Appointments Section, revealed that confidence is still at rock bottom. Firstly, you would be hard pushed to find a single private sector job advertised in there. Secondly, the number of Non-Executive jobs and Public Sector jobs seems to be dominating all aspects of the section. Indeed, I had a good chuckle seeing a nice advert for a well sponsored, 'Non Executive Director of The Year Awards' night which was to celebrate the outstanding achievements of these people who wear similar ties. No doubt Tom McKillip and the army of NXDs who sat on the boards of banks and other financial institutions getting fat and rich while doing nothing, will be right up there in the award ceremonies showing the way.

Getting back to the Appointments Section generally, it is clear that the Public Sector seems to be propping up the high end recruitment sector with companies like Odgers and Tyzack prominently and expensively displaying pretty naff Public Sector jobs. It seems the Private Sector has gone to sleep for a long while as the Section had been like this for around a year. I cannot recall a time in the two or three recessions I have sat through when the Times was so thin on Private Sector jobs. The hunt for good talent has gone underground at minimum, but it more likely reflects business conditions.

Meanwhile, in my layman's observationary mode, my wife and I ventured into London on Saturday and caught the final hour of shops around Oxford Circus. There were no shortage of shoppers - it seemed very busy. But the shop assistant I spoke to at Libertys pointed out that the credit cards were mostly not from the UK but are tourists enjoying the almost perennial sales we seem to have at the moment. We went for the early supper at a really superb restaurant on Poland Street, Vasco's, and had the pre-theatre meal of two courses for £19.50 each. The food was outstanding and the owner, observing that we were the only people in the restaurant, berated the fact that business has been like this for months - no early diners for the theatre anymore, but clogged full from 8 o'clock. He was right, Soho seemed absolutely empty and getting a drink with a group of friends at the Argyll Arms was easy, they even allowed us to fully occupy the upstairs dining area as only one family were in.

Pubs and restaurants are good barometers of the times we are in. On a Saturday night in early Autumn, with pleasant if windy weather, the eating and drinking places were nowhere near full or empty. London is no different from most cities. The green shoots are not so evident.

That said, the number of placards outside houses marked 'For Sale' seems to be on the rise in my area although I know some people who have had their houses on the market for 18 months with not a single viewing. It would be a shame if the biggest feature of a recovery is another housing boom as that would be a sure-fire indicator we put our money in the wrong place as they are precisely the kinds of stupid asset inflations that got us into trouble last time around. But that's another story.

For me, the green shoots are not yet in evidence in the right places.

Some Good News, At Last?

The average price of homes rose 0.9% last month according to Nationwide. Mortgage approvals rose from 32,000 in January to 38,000 in February. It could be signs that the economy has some 'green shoots' at last - or are they?

The measure of Quantitative Easing (QE) as started by the Bank of England last month has yet to take great effect and so the positive movement cannot be put down to that measure. Besides, in a volte face by Mervyn King in the face of unexpected and bad news of a rise in inflation, it seemed this was no longer the vogue idea.

In response, for the first time 14 years, an auction of National Debt failed as the markets got spooked.

As the G20 country leaders get into full swing today, there will be another crucial time in the City as the next debt auction takes place and the markets will be wary of the outcome. To keep the housing market moving, the theory is that some of that cash has to cascade down to house buyers in the form of more liberal lending terms.

The Dangers

While this is generally received as a good thing, we have yet to agree upon a new structure and strategy for the regulator, the FSA. One of the huge problems that we have faced was the crazy and far too easy terms of lending on houses that got us all delving into our mortgage equity to spend. Northern Rock was not the only bank to lend at over the asset value in its 125% Together mortgages and most banks who lent anything over 80% loan to value (LVT) in the last year or so have seen their buyers actually go into negative equity.

Perhaps it is time to set out the rules properly about sensible lending policy at banks like a cap at 80% LVT so that we do not make some of the same mistakes again. It really is time that household disposable income came to the fore as the fuel for lending rather than the hope of equity growth and release.

Or am I asking too much?