Strategy: the year ahead

The road to recovery

Stephen Archer, business analyst and director of Spring Partnerships, outlines his economic and business predictions for 2011.







What level of economic growth can we expect in 2011? I am forecasting growth of around two per cent in the UK on the basis that 2011 will see some unwinding of debt, though not enough to fuel GDP—quite the opposite as credit remains tight. We should in fact be content if growth is over 1.5 per cent, and over 2.5 per cent will be very good. We are one of the safer EU economies. Inward investment (vital) should increase, as should exports as the global economy shows genuine recovery and the pound stays relatively depressed. The UK will look like one of the better economies to base a business in.

Will there be a double dip? No, there will not be one; the fragile UK recovery and the stuttering US recovery have served to undermine confidence and drive investors away from equities to treasury bonds, gold and other safer havens. However, corporations are generally performing well and certainly far better than a year ago as evidenced by late enthusiasm for equities at the very end of 2010. Even the airline industry looks healthier. Cash piles are also being amassed in the corporations. The cash pile in US large businesses is around $2 trillion—enough to effectively wipe out the US national deficit.

So might we get a second dip? Consumer demand remains moderate and many are still reducing debt; and those that have cut personal debt are being more cautious. In the US, recovery has brought about a sharp increase in imports and a very unhealthy negative trade balance in 2010. Confidence in the government’s ability to manage the recovery is shaky. Nonetheless, the only likely cause of a second dip will be a climate of self fulfilling prophecy: everyone becomes a little more cautious and as a result, most indicators go the wrong way. Even this will only cause more of a blip, within the next three quarters. But as I have always said, the recovery will be bumpy (some call it choppy) and so we must not read too much into a new negative trend.

Inflation:The inflation figures announced last week were higher than expected but the reasons are twofold; partly fuel-related but more to do with a long period of price stability which has built up inflation pressure. This pressure is being released as price rises out of necessity and against a backdrop of more confidence in the economy as a whole. For this reason I do not expect the rate to rise much higher (if at all) and for it to drop back by spring after the VAT effect has settled in.

The rate should not (though it may) cause panic in the Monetary Policy Committee who may wish to raise interests rates. This inflation is not due to the economy hotting up—it is instead catching up.

Currencies: Dollar down to $1.70 and the euro down to €1.30 against sterling during 2011. The US dollar should, and I think will, be allowed (and encouraged) to float down to help its exports. Its current account balance is a disaster and I feel that Obama’s options are limited. China will not want to re-value the renminbi and will not do so. One cannot talk too long about currencies without considering trade imbalances. China has yet to declare that it sees a risk in its vast trade surplus; I think that point may come in the next two years, but not too soon and not in early 2011.

The big question is over the euro: arguably, this has been overvalued for some time. With a large part of the eurozone in debt troubles, it is remarkable how strong the currency is. Two things can happen with the euro. Firstly, against sterling the euro will fall 10 per cent within the next six months. We are witnessing the beginning of the end of the euro as we know it: the model is fundamentally flawed (

Logically, the broke economies—the PIIGS—should exit the euro in order to be able to devalue their way out of trouble. In reality, they cannot afford to do this with the bail debt that they now carry—so far only in the case of Ireland and Greece. No, the back may be broken by the political backbone of Germany that runs out of patience (and funds) with the feckless partners. Indeed, the German courts may do this before the electorate does.

What will happen to employment figures?Unemployment figures will climb back up to the 2.6 million level from the 2010 low of under 2.5 million. Only 100,000 more? Yes, I think the pessimism is excessive on unemployment; this is rooted in fears of inflation, state layoffs and a slowdown from other pressures. The economy will be more buoyant in 2011 despite the cutbacks staring to bite. This is a paradox; but so it will be proved in my view. Investment will increase and with it employment—enough to largely cancel out any other unemployment from the state.

Will there be industrial action?I am less optimistic on this; the unions have shown a tragic level of unintelligence in forcing industrial action through and never achieving a thing aside from public ill-will and costs to its members—Bob Crow of the RMT being a good case in point. Industrial action I think will become more fashionable in 2011 (for fashionable is all that you can call it)—especially if the weather is nice. Mobs do not turn out in blizzards and rainstorms. The ideology is not that dedicated!

Will interest rates change? No change until Q2, when it goes up 0.25 per cent. Not a big jump but symbolically huge. This will be in response to the inflation level and will be seen by the outside world as a gesture of confidence in the economy on behalf of our central bank. If the 0.25 per cent rise does not cause any adverse reactions, then they may raise it by another 0.25 per cent in Q3.

What’s going to happen in banking?Less than the public thinks—or hopes! Here is an area where there will be some softening of taxation plans. The political headlines and the execution detail will diverge somewhat. The electorate despises the banks; but they are vital to the UK economy and cannot be allowed to go offshore.

Will there be more quantitative easing?Quantitative easing will be inevitable in 2011. This is not a widely held view and it might get ‘re-positioned’ as debt swap or bond re-issue; the amounts needed are eye watering. Banks all over the advanced economies face a huge refinancing challenge over the coming few years. Private sector funding will mature and state funding will need to be paid back. The total bank funding is at least US$5 trillion of medium to long term funding maturing over the next three years. UK banks will need to refinance or replace around £750 billion to £800 billion of term loans and liquid assets by the end of 2012. For this reason alone, I think quantitative easing is inevitable in 2011.