Road to recovery
The strengthening of the pound, an increase in house prices - are these the first signs of recovery, or the hallmark of a dead cat bounce?
Is it possible? Are we witnessing the first signs of recovery?
Well something certainly occurred in Britain this week. Since being branded the worst effected of the industrialised nations by the economic downturn, the country’s fortunes over the last seven days seemed to have taken a mild upturn. And the Government hasn’t even pursued that most dreaded of ideas yet, quantitative easing: the printing of new money.
The first clue that this was a better week was the Bank of England’s half percent interest rate cut on Thursday.
What does that achieve in terms of economic recovery? Well, absolutely nothing. And that’s the point.
A one percent cut would have indicated to the markets that things are very bad indeed.
But look at what the 0.5 percent cut did for sterling. The pound strengthened sharply after the BoE announcement. Normally an interest rate cut weakens a nation’s currency because it sends out the message that holding assets might be risky.
In the UK’s case the markets thought otherwise.
The pound climbed more than a cent against the dollar, to $1.463, and strengthened against the Euro at €1.13.
But there was more. And this is what caught everyone by surprise.
UK house prices rose by 1.9 per cent in January, according to the Halifax house price index.
Halifax’s housing economist, Martin Ellis was quick to point out that a one off spike says nothing about a market.
But he added: “There are some very early signs that market activity may be stabilising, albeit at quite a low level.”
The house price rise was the first since January 2008 and coincides with other indicators and surveys that housing market activity may be bottoming out.
That is certainly the message from moneyed Europeans who in the last six weeks have been taking advantage of the low UK property prices and the weakened pound.
If there is some cause for optimism, there is still much concern over unemployment, which is growing at a great rate, and another fall in consumer spending.
The Office of National Statistics revealed earlier this month that UK unemployment rose at its greatest rate since 1997 - to 1.92 million in the last quarter of 2008.
Figures released earlier this week by the Purchasing Managers' Index (PMI) showed manufacturing remained weak in January, after a seasonal improvement in December.
The Confederation of British Industry (CBI) released a survey at the weekend showing that small and medium-sized manufacturers were shedding staff at the fastest rate since the early 1990s.
According to the CBI’s quarterly SME Trends report, the volume of total new orders during the quarter slumped at its fastest rate since July 1991.
This was on the back of shrinking volumes of domestic and export orders (a balance of -45 per cent for domestic orders and -21 per cent for export orders).
What was most worrying was the amount of firms concerned about the access to credit and finance doubled from the previous quarter.
The Bank of England’s monetary policy committee pointed to a ‘severe and synchronised downturn’ in the world economy, weak consumer spending and a ‘constrained’ supply of credit when it announced the 0.5 percent interest rate cut on Thursday.
But it also said that the four-percentage-point rate cut since October and the falling value of the pound had provided a ‘considerable stimulus’ to activity as 2009 progresses.
Prepare for some ‘quantitative easing’ to rain down on the seeds of recovery if things take another bad turn.
