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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Economists cast doubts on mood of optimism. NIESR warns of second recession. Euro contagion. Posen calls for more targeted QE.  Broadband speeds increase again. Companies in the news: Imperial Tobacco, Unilever

Economists cast doubts on mood of optimism

It’s happened twice now. Twice in just two days, a leading economic think tank has been pretty downbeat on the UK’s short-term economic prospects and suggested now may be the time to hold back on some of that austerity. MPC man Adam Posen has had a thing or two to say, too.

The Institute of Fiscal Studies (IFS) suggests short- term stimulus, but frets about the longer term.

It began with the IFS. Time was when the IFS was a pain in the government’s, well, in its exterior. Then it came up with a cunning plan. Why not make its director Robert Chote, a man known for disagreeing with official estimates on GDP and fiscal lending, the head of a new body called the Office of Budgetary Responsibility. And that’s what happened. As a result, these days the IFS is Choteless, but that pain has not gone away.

The IFS, in conjunction with Oxford Economics, now reckons that the UK economy will expand by a mere 0.3 per cent this year. The OBR has predicted 0.7 per cent expansion. That’s not very good. But things look even worse, when you factor in that the IFS says that, thanks to all the uncertainty related to the euro-area, the risks to its forecasts are on the downside. And yet it was not all bad for the government. The IFS also reckons the UK government will under spend by £3bn this year. “We are also more optimistic,” it stated, “about future tax receipts than the OBR, meaning that if the economy broadly evolves as the OBR expects then borrowing could be £9 billion lower in 2016–17 than the official forecast.”

So given that finances are better than expected, but the economy is worse, the inevitable conclusion is that the IFS came out in support of a short term fiscal stimulus for the UK economy this year. But how much money can the government afford to spend? This is what the IFS said: “A small loosening would be likely to deliver only a small boost to the economy, while a big one might risk undermining investor confidence.”

And then the IFS returned to its favourite theme – warning us how severe government cuts are going to be. “The sheer scale of the cuts is daunting,” it warned, “almost without historical or international precedent.” It added that: “they represent the biggest sustained cuts seen in the UK since the Second World War. Perhaps the only relevant example of such deep cuts being delivered elsewhere in recent decades is Ireland in the late 1980s. By the end of 2011–12 a mere 6% of the planned cuts to noninvestment public service spending will have been implemented. How deliverable the remainder will prove to be, remains to be seen.

“On the other hand these cuts come after the largest sustained period of increases in public service spending since the Second World War. If implemented the planned cuts would, by 2016−17, take public service spending back to its 2004−05 real-terms level and to its 2000−01 level as a proportion of national income.”

NIESR warns of second recession

Meanwhile, the National Institute of Economic and Social Research (NIESR) has forecast a 0.1 per cent contraction for the UK economy in 2012.  And by the way, it now looks as if the current downturn (meaning period of time since GDP last peaked) is already the longest in recorded history. If NIESR is right, that record for the longest downturn is going to be thrashed.

But NIESR does reckon 2013 will see a marked improvement, with growth of 2.3 per cent (and once again, a forecaster is optimistic about next year). During the early months of a new year, the forecasts for the following year always seem to be encouraging. Then as winter turns to spring and then summer, forecasts for next year are downgraded, but optimistic forecasts for the year after start appearing. (Presumably, if you keep saying next year will be better, eventually you will be right – and what a nice headline that will make.)

NIESR believes the first half of this year will see a technical recession, but then come the latter months of the year, the magic wand will be waved – perhaps China will have saved Germany’s blushes and the euro crisis will be over – and things will hum along nicely.

It said: “A temporary easing of fiscal policy in the near term would boost the economy.  The credible commitment to a sustainable fiscal policy over the longer term provides the Government with the flexibility to provide a clearly defined and temporary boost to near-term demand. An increase in government investment would not have a significant impact either on long-run sustainability or – given the way they are defined – the likelihood of the Government meeting its fiscal targets.”

Euro contagion

There are reasons to be less sanguine.

The trouble is that all this assumes the euro crisis will somehow come to an end. If it doesn’t, most forecasters agree the UK’s problem will linger on and on.

No one has yet uttered these words, but if Greece does indeed pull out of the euro this year, as many expect, and if the markets then focus their venom on Portugal (given the level of yield on Portuguese bonds at present, it could be argued they have already done this), such that Portugal leaves the euro, and the single currency looks rocky, then maybe the UK will suffer a treble dip recession.

There, said it! Just remember you read it here first.

Posen calls for more targeted QE

As bottomless pits go, the pit where the money created by QE feels pretty big. (Apologies if that read like an oxymoron.)

Yes, the Bank of England may well announce another bout of QE this week, but how much good is it doing?

It is hard to say for sure, maybe QE is the reason why the yield on UK bonds is low.

But MPC dove Adam Posen has a theory.

He wants to see QE targeted more precisely.

Actually, yesterday was a busy day for the arch dove. He told the BBC that banks are going too far in re-building balance sheets. “They’ve overreacted,” he said, “not just in the UK but worldwide, and they’ve cut back on all kinds of lending that could be productive.” Turning to lack of lending to business, he said: “When banks say it’s all about no demand, that’s crazy. Fees, prices and spreads on loans going to small businesses are going up, and normally prices don’t go up when demand is falling.”

Also yesterday, he told Bloomberg: “I am certainly leaning towards doing more QE.”

But earlier in the day, he gave a speech at the TUC in which he called for QE to do more for business. “We need to think of ways of pooling lots of business loans so they become a fit investment for big investors,” he said. And added: “Where I differ from some of my colleagues on the MPC is that, just as the ECB is demonstrating now, you can do monetary policy on things other than sovereign debt… It would not be the end of the world if the MPC were, as part of the asset purchases, to buy things other than gilts in service of this structural change.”

Broadband speeds increase again

No doubt you have heard of Moore’s Law – that’s the idea that computers double in speed every 18 months. The realisation of this law has probably had more impact on the global economy than is commonly realised. The law should be referred to in all economics text books; that it rarely is, shows how out of touch with reality some economic teaching is.

But have you heard of Butter’s Law of Photonics, named after Gerald Butters, the former head of Lucent’s Optical Networking Group at Bell Labs. Butter’s Law says, and the quote here comes directly from Wikipedia: “That the amount of data coming out of an optical fiber is doubling every nine months.”

Why is that relevant?

Well look at broadband speeds. According to data from Ofcom out this week, broadband speeds in the UK increased by 22 per cent last year, up to November 2011. On this occasion, it was not so much Butter’s Law at work, more a case of more upgrading in the network from copper to fibre optic.

Then yesterday, BT announced a new ultra-fast broadband service of around 80 mbps. Virgin Media has already revealed plans for a 120 mbps service.

Do you remember the days before broadband? That was when logging on was a hit and miss affair, and involved listening to the modem singing that dismal tune of ones and zeros to us. Just as computers are getting faster, so too are broadband speeds. The implications for business and the economy are profound.

Companies in the news

Bull:  The ‘Telegraph’s’ Questor took a look at Imperial Tobacco. Well, what with dividends at 4.6 per cent, the prospective yield rising to 5.1 per cent, and a forward earnings ratio based on September earnings of 11.2, Questor reckons the shares are looking cheap.

A report from BNY Mellon Wealth Management and Janney Montgomery Scott put Questor in an even more bullish mood. It “showed that the MSCI World Tobacco Index had the highest return out of 67 groupings in the MSCI World Index in the 10 years to 2011,” stated Questor. And the conclusion it drew was “buy”.

Questor stayed in a good mood when considering Unilever. Shares have fallen of late, and are now below the level when Questor last tipped the stock. It likes the look of the forward earnings multiple of 13.1 based on expected earnings in 2012, and a prospective 4 per cent yield rising to 4.3%.

Around the Internet

This is a good piece on Reuters about Facebook Analysis: A sobering look at Facebook

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