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It seemed that it was time to sigh with relief. In Q1 the runes were looking good. But not so fast, data out yesterday from the ONS was most worrisome. Q4 growth downgraded, If interest rates are so low, why are savings so high? M&A fall. House prices fall too. Some good news in the data. Companies in the news: Kenmare, Petropavlovsk, Ophir.


Q4 growth downgraded.

2011 was not a happy year for UK plc.

The ONS does like to tweak. Every few weeks it revisits its data. If you were to keep score of economic data, and create a spreadsheet based on initial ONS estimates, and then a few years later compare the final data with the data you diligently recorded, the difference would be  quite shocking.

The press of course, focus on the initial estimates. The headlines may proclaim that UK avoided recession, or UK in the mire. But then when the dust has settled and the final data is released, we find that actually the UK did fall into recession, or that the mire was avoided. But by then no one cares, and focus is on the next batch of initial estimates, and, once again, headlines are written based on information that is almost certainly wrong.

One good rule may be this one. When things are getting better, ONS initial estimates tend to understate the recovery, and when things are getting worse, ONS initial estimates tend to be too positive.

The first two estimates for UK GDP in Q4 had a contraction of 0.2 per cent. Yesterday’s data showed that actually the contraction was 0.3 per cent. Actually, as revisions go, this was not that drastic – in fact it was pretty mild. It is just that it will be interesting to note what the data on Q4 2011 says in a couple of years’ time. Don’t be surprised if it is almost unrecognisable from the first estimate.

Anyway, here are the latest estimates for UK growth over the four quarters of 2011, with the estimate from three months ago in brackets: Q1 0.2 per cent (0.4 per cent), Q2 -0.01 (0.0), Q3 0.6 (0.6), Q4 -0.3. For the year, the UK expanded by 0.7 per cent, against 0.8 per cent according to the previous estimate.

In fact it does make all the talk about recession or not seem a bit daft. In three out of the last five quarters the UK contracted. But because none of the contracting quarters were in succession, the UK avoided recession.

Technically the UK did not suffer recession, but the true picture is that the UK is limping along bottom, sometimes growing, sometimes expanding.

The various business surveys, however, suggest that Q1 was a touch better, so it seems that – once again – recession is to be avoided. But it is far from certain.

But perhaps a more important stat is this: in Q4 last year real household disposable income fell by 0.2 per cent. Over the last eight quarters, this has been negative on no less than five occasions. Forget recession. Does it really matter if the economy is expanding or contracting? What matters is how households are doing. Households became worse off for two quarters in succession in the second half of last year. It seems Q1 2012 is unlikely to be any better. If we look at real household disposable income instead of GDP, the UK is once again in recession.

If interest rates are so low, why are savings so high?

While it was busy revising data, the ONS also decided to up its estimate of household saving in the third quarter. It now has the savings ratio at 7.9 per cent, instead of 6.6 per cent that it previously thought.

The UK savings ratio in Q4 was 7.7, or so says the ONS.

Of course, savings in the corporate world are much greater.

According to Ross Walker, an economist at the RBS, no less than £745bn of cash is sitting in corporate balance sheets. That is around half of UK GDP.

So there is the oddity, interest rates are at record lows, in fact allowing for inflation they are negative, and both households and companies seem to want to hold cash.

Writing in the this morning’s ‘Telegraph’, Andrew Lilico – an Economist with Europe Economics, and a member of the Shadow Monetary Policy Committee – argued that interest rates are below the natural rate of interest, which is the level of interest rate when the economy is in equilibrium.

Mr Lilico therefore believes we will see “mal-investment”,  and argued for the Bank of England to up rates next month. See Global Takeovers: The Bank of England should raise interest rates next week

But if it is the case that savings are so high, why is there is all this cash sitting idle? How can it be argued that interest rates set by the Bank of England are less than the natural rate?

This is the dilemma faced by the Bank of England. Economic theory says when rates are slow, savings are less.

And just as some argue rates are too low and need to go up, others argue that we are in danger of hitting what’s called a dap liquidity trap, a situation in which rates need to fall below zero in order to stimulate the economy. The snag with that is that negative interest rates are impossible.

M&A fall

Of course, since companies have all this cash, many predicted a rise in mergers and acquisitions this year. This may yet happen, but hasn’t so far.

According to Bloomberg: “Mergers and acquisitions so far this quarter fell 14 per cent from the fourth quarter to $416 billion, making it the slowest three-month period in 2 and a half years.” In fact, Bloomberg has M&A activity falling for three successive quarters. See Drop in Quarter as Bankers See Revival:

House prices fall too

And finally, data from the Nationwide revealed that house prices fell 1 per cent in March. Frankly, so what? Data from the Nationwide, Halifax and Hometrack has been up and down like a yoyo, and the three rarely agree on the monthly data.

But on this occasion, the Nationwide recorded a 0.9 per cent annual change, the first year on year fall it has observed in six months.

The end of the stamp duty holiday was cited as the reason behind the fall. Robert Gardner, Nationwide’s Chief Economist, said: “This dampening effect on housing market activity and prices may fade over the course of the summer, especially if the wider economic outlook begins to improve and other policy measures, such as the Government’s NewBuy Scheme are successful in supporting buyer demand. However, in our view the challenging economic backdrop is likely to continue to act as a drag, with house prices moving sideways or modestly lower over the next twelve months.”

Some good news in the data

But at least UK exports rose in Q4. In fact, UK exports rose 1.6 per cent in Q4, compared to a 0.9 per cent rise in imports.

Domestic demand shrunk by 0.5 per cent, but with wages taking such a hit that is hardly surprising.

With UK consumers saving more, even when rates are so low, it is clear that the UK economy needs to export more. At least in that regard, Q4 was promising. Although it is worth noting, that over the year, the growth in exports was tiny (less than one per cent).

Companies in the news

Bull:       This morning Questor in the ‘Telegraph’ tipped Mozambique titanium dioxide miner Kenmare. “It is expanding production in a market where it has pricing power,” said Questor and added: “buy”.

Tempus in the ‘Times’ liked the look of Petropavlovsk – gold mines in Russia. The company’s boss says it produced approximately as much gold as Rangold Resources, but has a quarter the valuation. Tempus says “buy”.

Bull and bear:    Yesterday, Questor in the ‘Telegraph’ took a look at Ophir, and said: “hold”. Today Tempus did much the same. The company has a drilling programme in Africa. It has no less than 17 oil and gas projects in eight different African jurisdictions. A recent find in Jordan has been good for the shares, but they have risen sharply. And it is the strength of the share price that has meant Questor could only bring itself to say “hold”. Tempus says some investors may feel now is the time to take a profit.

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


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