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Michael Baxter

Bull and bear: UK avoids triple dip, and does so easily

Written by: Michael Baxter on April 25th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: UK avoids triple dip, and does so easily. Italy brings in old school to make new policy. Barossa criticises the right policy. IMF praises Germany. US sees another economic shock. South Korea jumps. Companies in the news: Kier, Standard Life, DS Smith

UK avoids triple dip, and does so easily

Services saved the day. The long awaited alignment in the UK economy, as we move from services to manufacturing and export-led growth has been put on hold. But hey, who cares? The UK is not in recession.

In fact the UK economy expanded by 0.3 per cent in Q1, much better than just about any forecaster predicted. And once again the ONS surprises, but this time on the upside.

Drill down and the picture is not quite so good. Services expanded by 0.6 per cent. Industrial production, with North Sea oil in the vanguard, was up 0.2 per cent.

Manufacturing fell by 0.3 per cent, and construction was down by a whopping 2.5 per cent.

Chris Williamson at Markit said: “The upturn in the first quarter merely makes up for the decline in the final quarter of last year and leaves output largely unchanged over the past year and a half. The worry is that, even if the economy is gaining some momentum, the best we can expect is very meagre growth for as long as inflation runs high and the eurozone crisis rolls on.

“A continuation of growth in the second quarter is by no means assured. The eurozone crisis is not only hurting exports but is also having a damaging effect on global business confidence. At the same time, weak domestic spending and investment by businesses can be linked to lingering uncertainty about the economic outlook and a lack of lending. Consumer spending is meanwhile being subdued by job worries, low pay and high inflation.”

Vicky Redwood, UK Economist at Capital Economics, said: “The big picture is that output is still about 3 per cent below its pre-recession peak. What’s more, the recovery still faces significant obstacles ahead, with households still experiencing falling real pay and policymakers still struggling to get bank lending to rise.”

Bull:       (At least sort of bull.) Ms Redwood said: “Today’s figure offers some hope that things might finally be starting to move in the right direction again.”

Sort of bear:       But then Ms Redwood added: “The chances of more QE in May are probably now fairly slim.” Mr Williamson said: “The upturn significantly reduces the likelihood of the Bank of England sanctioning further quantitative easing at its May meeting, but any renewed weakening in the business survey data during the second quarter could spur renewed action.”

And for austerity:  What is clear is that the latest data will be used by George Osborne to argue there is no need to go soft on austerity.

Italy brings in old school to make new policy

And so Italy has a new Prime Minister in waiting. The 46 year old Enrico Letta is the man chosen by Italy’s President – 87 year old Giorgio Napolitano – to lead the country’s next government. Actually the word ‘chosen’ is a bit misleading. What Mr Napolitano actually did was bang heads together, until a consensus was agreed.

It may be good news for fans of Silvio Berlusconi, who will be a key figure in the Letta government. (In fact Mr Letta’s uncle was a key figure in the last Berlusconi government.) It is also good news for those who feel quite outraged by the way in which the Italian legal system has treated its noble former PM and media magnate. Judicial review may be on the cards.

Mr Letta may be young, but in his views and what he represents, he appears to be old school.

Talk is that Mr Napolitano flirted with the idea of asking the Mayor of Florence, Matteo Renzi, to lead the government. There was a snag with that. Mr Renzi is decidedly not old school. In fact he wastes no opportunity to attack the political class, including Mr Berlusconi. That makes him very popular with Italians, but very unpopular with the political class, whose consensus is required for a government to be formed. Mr Berlusconi, in particular, was… how can one put it?… unenthusiastic about the appointment of Renzi.

And by the way, in this saga the role of king maker may not belong to President Giorgio Napolitano at all; rather it may be the domain of Berlusconi.

Be all that as it may. Before he had even taken up office, Mr Letta has laid into austerity. He said: “Europe’s policy of austerity is no longer sufficient.”

Barossa criticises the right policy

You can see why austerity is unpopular in Italy.  But the latest remarks from EU Commission President José Manuel Barroso are a trifle puzzling.

Talking about austerity, he told a conference in Brussels while the policy is fundamentally right it has nevertheless “reached its limits”.  He said: “A policy, to be successful, not only has to be properly designed, it has to have the minimum of political and social support.”

So what is Mr Barroso saying? Is he really saying he agrees with austerity, but because no one else does, he disagrees with it?

IMF praises Germany

Meanwhile, Olivier Blanchard, chief economist at the IMF, took time off from urging George Osborne to reverse course, to tell Germany to carry on as before.

He told German newspaper ‘Die Zelt’, that he thinks:  “The German budgetary policy generally speaking is appropriate, while the Americans are doing too much.”

It’s slightly hard to follow that logic. After all, Germany is the great Austerian, and the US is about the most Keynesian of the Western world’s largest economies at the moment.

Of course, in the good old days when the global economy was growing, it was expanding on the back of the US debt. Maybe Mr Blanchard is saying we need to see a return to the good old days.

US sees another economic shock

It was another set of woeful economic stats relating to the US economy. Tomorrow, the first estimate of US GDP in Q1 will be out. Whatever it says, it is becoming clear that the quarter didn’t end on a good note.

Consumer confidence indices have been falling, the latest jobs report was a disappointment, the PMIs have not looked so good, and now it is the turn of durable orders to bring troubles.

Durable goods orders fell 5.7 per cent in March. A fall, possibly a one-off fall, in commercial aircraft bookings didn’t help, but even without this the data was still lower than last month.

Next week will see the closely watched conference board measure of US consumer confidence, the jobs report from April, and April’s PMIs. The omens are not looking promising.

South Korea jumps

Q1 may have given South Korea reasons to worry, what with its troublesome neighbour to the north, but the economy did rather well.

It expanded by 0.9 per cent on the quarter before. An impressive 3.2 per cents surge in exports helped.

Looking forward, there are reasons to think the rest of the year won’t be quite so good. The falling yen will surely dent the country’s exports to Japan. The worsening economic picture in China, the US and Europe won’t help either.

Consumers are in debt, and are unlikely to go out spending any time soon.

Capital Economics forecast growth of 2 per cent for the country for this year.

The most bullish thing one can say about South Korea is Samsung; the most bearish North Korea.

Companies in the news

Bull and bear:    Hold was the order of the day with the tipsters at the ‘Times’ and the ‘Telegraph’.

Tempus at the ‘Times’ took a look at construction services group Kier, which has been trying to buy out May Gurney. Tempus said: “Await developments.”

Standard Life impressed many with its latest results. Tempus said CEO David Nish is a success story and the company is ahead of the pack. Tempus said: “If you buy the growth story then stay put.”

Finally at the ‘Telegraph’ Questor took a butchers at recycling and packaging firm DS Smith. It has been reaping the benefits from the purchase of Swedish company SCA, and has a prospective 3.8 per cent, rising to 4.3 per cent. Its valuation moved Questor to say don’t move, however, and recommended “hold”.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Barroso Blanchard austerity, DS Smith, Enrico Letta, Kier, South Korean economy, Standard Life, UK avoids triple dip, US durable goods orders

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