WE KNEW it was bad, and we were right. The deeper-than-feared contraction of the economy in the final quarter of 2012 reported on Friday ushered in dire warnings about the consequences.
Not least of these is the concern that, if shrinkage happens again in the current quarter, our economy will have hit the unprecedented “triple dip” recession.
But while most people are feeling the pinch of higher prices and the fear of job insecurity, the definition of recession – two quarters of fiscal contraction in a row – has been trumped up to signify something meaningful, when actually it is more of an abstract economic concept.
As such, the fear of recession the “triple dip” label engenders makes worse the actual economic decline as consumers keep their wallets in their pockets and businesses decide to hang onto their capital rather than splash out on new machinery, staff or research.
But the most worrisome consequence of the last quarter’s poor performance is its expected effect on the value of sterling. The 0.3 per cent contraction in the final three months, which added up to a flatline for the economy overall in 2012, means the UK is on track for a downgrading of its triple A rating, the doom-mongers have predicted.
And while this is unlikely to spook investors too much, the Chancellor, George Osborne, will have egg on his face for persistently thumbing his nose at hints from the International Monetary Fund that his plan “A for austerity” management of the economy has done more damage than good.
On the day the Office for National Statistics broke the bad news, sterling exchange rates dipped. Yet the reaction in the markets was exuberant, with the FTSE 100 and 250 indices gaining ground.
At the top of the pile in early trading was Thomson Holidays owner Tui Travel, with other travel stocks such as easyJet and Thomas Cook also making a good show. Perhaps investors expected a boost in flight sales among Europeans keen to take a cheap holiday in the UK as the pound fell in relation to the euro.
The worst thing about losing the triple A for Britain will be the disastrous effect it has on Osborne’s ego – if not his chances of keeping his job. For the most part, buyers of the currency disregard what the ratings agencies have to say, having priced in the fragility of the pound already.
Gerard Lane, an investment strategist for brokers Shore Capital, reckoned that the pound is 20 per cent overvalued and set for a slide. But then he also argues why this might not be such a bad thing. While a collapse in the value of the pound would be calamitous for the likes of wine drinkers and pensioners – especially pensioners who drink wine – for exporters it could be a boon.
The pound falling below parity with the euro would serve to boost competitiveness – and not just for those trading within the Eurozone, our largest trading partner – but also in emerging markets, where buyers might just start to think they can afford our exports, whether they be in goods or services.
Yet what Lane fails to mention is that many countries are also tinkering with the same idea – deflating currency and holding their breath while they wait for exports to grow. If more countries go the same way – and Japan and Switzerland have certainly been dipping toes in the currency stream – the hoped-for upside is flattened and not much changes. Except the stronger growing economies – China is the biggest elephant in this room – are then able to take a permanent advantage over the faltering weakness of the others. It is a risky game.
Another concern, particularly for Scotland, was that the contraction at the heart of the last quarter’s figures was caused mainly by problems out in the North Sea. As the economist Howard Archer noted, repair work on the Buzzard Field caused as much as 0.2 per cent of the GDP contraction. This highlights that the North Sea – a “mature” asset with loads of creaking old pipelines and platforms – is a headache, particularly for those who believe that an independent Scotland can found its economy of the remaining deposits of hydrocarbons buried under the sea off Aberdeen.
Last year was a terrible one for the North Sea. Output declined as so-called “planned outages” on the important Forties pipeline extended well into the fourth quarter. Analysts claimed the stop-start output last year from the Buzzard Field – owned by Canadian oil giant Nexen – was “worse than Nigeria”, where regular bouts of sabotage and endemic oil theft make recovery there a challenge, to say the least.
Nexen had planned to shut down Buzzard, which pumps out 200,000 barrels of the black stuff a day, in September, for 28 days. But then the work was delayed until October, with subsequent power outages putting pressure on global prices. Woes continued into January as a shutdown of the Brent pipeline system, caused by the discovery of a leak at Abu Dhabi-owned Taqa’s Cormorant Alpha platform, prompted Opec to predict output this year would fall to the lowest level since 1977.
The impact on the UK economy was evident. But what should give pause for thought is the fact that the impact of such disruption on the economy of an independent Scotland would be even more severe.
Yet what should go a long way to solving the problem is the arrival this year of Osborne’s legislation on tax relief on decommissioning the North Sea’s clapped out infrastructure. Assurances on tax incentives and an expected £40 billion worth of investment flowing into the region on the back of the most recent licensing round, and the opening of areas to the West of Shetland, can only be positive for the economy, although the investment bonanza is sure to only rile the green lobby.
Likewise, an independent Scotland would have to promise to uphold anything Osborne hands to companies responsible for North Sea infrastructure, in the event of a referendum Yes vote.
Nevertheless, it will not be a good year for the Chancellor. Even if a weak pound does lead to a pick-up in exports, it won’t make him a popular man at home. A downgrade and triple dip would prove two further insurmountable stumbling blocks to any political career. A third recession is pretty much expected – while we have been hearing about the cuts since the coalition came into power, the effects of these are only due to start biting this year. Likewise, there are no “bread and circus” type events such as the Olympics or the Jubilee to boost spending.
But while the GDP figures only add to the gloomy outlook for most Brits, there is hope that the third recession might just be the last of it. The government’s Funding for Lending Scheme could act as an emollient for the economy this year, and the US is feeling frisky – company earnings in the last quarter raised eyebrows.
And while Europe may be wounded, it is still walking. In the UK recent figures have shown that employment is better than most could have expected. And while most of us who still have jobs realise this is mainly because our wages have been stagnant, most can still stretch to a bottle of French plonk. At least for now.