Let me preface this article by defining a double-dip recession: it is a term coined by economists, meaning two consecutive periods of negative GDP growth.

Britain is still vulnerable to a double-dip recession – but whether it be next quarter or not is anyone’s guess. There was a surprising GDP figure last quarter showing a contraction of 0.5 per cent, which was emphatically blamed on the weather. This data has recently been revised down to 0.6 per cent, and of this ONS predict that 0.4 per cent decline was due to the snow. Taking that into account we have a relatively small contraction of 0.2% ,leaving us with an indifferent economy. However, this bad weather merely delayed shoppers from spending, with a rush recorded just after Christmas to take advantage of the sales and to beat the impending VAT rise.

Oxford Street

Oxford Street by Russell McGovern, shared under Creative Commons

An interesting survey by the CBI suggested that retailers are increasing their prices due to inflation and VAT. These two influences coupled with weak demand leaves the sector expecting to have a poor February and not foreseeing a return to good fortunes in March. This does not appear to be a return to the normal level of the pre-Christmas period. The large increase in sales at the start of January has clearly tailed-off and likely to remain relatively low due to weak demand and rising prices. This could continue well into the summer as inflationary pressures feed through to consumers.

Another worry is that austerity measures have not been fully absorbed yet; note the 300,000 jobs yet to go in the public sector, household spending decreasing as cuts start to bite and wages not growing with inflation (wage stagnation) – all leaving households with less spare change.

Both middle-class John Lewis and cheap-and-cheerful Primark, have felt the tightening of the belts. This is worrying. If John Lewis records a drop in sales then other, cheaper, shops could be expected to see their sales remain constant as the John Lewis shoppers move to lower brands. But this is not the case. Could the loss in consumer confidence be the first warning sign of worse things to come?

The service sector is also struggling to pick up momentum as bank lending is low and consumers are less likely to use the purchasing power while being squeezed. Job growth in this sector has also stalled. Manufacturing, on the other hand, is performing much better with positive growth and an increase in employment for the first two months of this year. This could point to a surge in global demand, however inflation is still a major worry. We seem to have entered a two-speed recovery, which makes predicting a double-dip recession particularly difficult. It is likely that should there be growth next quarter it will be closer to zero per cent than 1 per cent.

With the domestic situation somewhat ambiguous we can look at the possibility of exporting our way to growth. This is an area that the coalition is working hard on, sending large trade delegations to India, China and last week to Egypt (though Cameron taking weapons manufacturers is probably morally debateable). Although the pound is relatively weak it seems that manufactures and businesses are not taking advantage and increasing their sales volumes overseas.

In February 2007 $1 was worth 51p by Feb 2011 $1 was worth 62p. Therefore, if a company bills in dollars they will generate 21% more profit in 2011 than in 2007 even if they are selling the same volume of goods. But if that is the case then why did Britain have its greatest ever trade deficit of £9.2bn? It could be in part down to inflation increasing the price of raw materials that manufacturers are importing. Inflation in China last year was around 7% while India hit 9.47%. However, there has been a bounce back in January with the UK’s deficit on trade in goods at £7.1bn for Janurary. This is reflective of the improvement of the manufacturing sector.

Companies that deal in Euros have noticed their profit margins shrink as the euro weakens to the pound. Exporting companies have missed a trick and should have pushed for greater sales volumes rather than relying on the weak pound to prop up their profit margins, as these profit margins are diminished quickly when the pound strengths.

A final worry is inflation, currently standing at 4% and has been consistently above the 2% target for over a year. Mervyn King argues, and I agree with him, that most of the inflationary pressure comes from externalities such as oil price shocks, increase prices of imports, which all lead to higher output costs for companies who then pass the price rises onto consumers.

And with the trouble in the Middle East prices are inevitability going to continue to rise and inflation will creep towards 5%. The worry is that contagion will spread to other, larger, oil producing countries such as Algeria and Saudi Arabia. Politics aside, a long term oil problem could not come at a worse time for the global economy.

This is also doubly troublesome for the Coalition. If energy prices rise then costs to businesses will increase while households are simultaneously being squeezed further. This will add further pressure on the private sector. The problem for the Coalition is thus: they are relying greatly on private sector to pick up the pieces of the government’s dismantling of the state, however if businesses do not have the confidence to do so it leaves Britain even more vulnerable with an increasing chance of a double-dip and truly broken society. A growth strategy is desperately needed – we need only look at the Pfizer case to understand that the Coalition does not have an industrial growth strategy.

David Cameron at first Cabinet meeting

David Cameron, No 10, shared under Creative Commons

It is clear that there is a long way to go before Britain can gather some momentum and get out of trouble, but are the Coalition plans too hasty? To draw on the words of Sir Alex Ferguson, ‘it is squeaky bum-time’ for the Coalition. We need to watch this space and particularly concentrate on the ability of the private sector to pick up the slack created by rolling back the state – if they fail so will the Coalition.

It is all well and good talking about rolling back the state in an ideological Notting Hill debate but without practicalities, government support and most importantly motivation of the private sector it will not work. The State will be left to repair the nation after Tory rule once again .

I have touched on some varied topics in this article and plan to explore certain themes in more depth over the next few months. In particular I’m interested in the government’s growth strategy as tool to reduce the role of the state, the importance/unimportance of concentrating of GDP growth, global currency exchange rates and reserve currencies, unreliability of economic predictions, financial regulation and a few other issues that tickle my fancy.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s