Pick out a few of Alistair Darling’s forecasts from his budget speech on Wednesday and you might think the worst of the recession was behind us. He thinks, or says he thinks, that the UK economy will be recovering by the end of the year. Better still, he thinks it will grow by 1.25% next year and by a splendid 3.5% the year after that. We’d love to think he might be right, but we strongly suspect he isn’t. There may be the occasional green-looking shoot around, but these represent more statistical inevitability than recovery: even the most brutal of downturns comes with the occasional positive number.
Even if there were signs of things getting worse less fast than they were, this doesn’t for a minute mean a real recovery will follow. The number of unemployed has already hit 2.1 million. But that’s just the beginning. Wait until this school year ends. Think all those new adults will find work by September? Think again. At the end of the first quarter, there were only 462,000 vacancies, down 68,000 on the previous quarter.
At the same time house prices aren’t going to rise again anytime soon. Nor are earnings. And the savings ratio looks set to keep rising – who spends money in an environment like this? Add in a rising tax burden and it’s clear there will be a drag on consumption for many years. It’s hard to see how an economy can grow at anything like 3.5% in these circumstances, particularly when it’s weighed down by record levels of public-sector debt. We may want it to happen, but in recessions like this, wanting isn’t getting.
It’s yet more reason to be suspicious of the recent stockmarket rally. Analysts can always prove stocks are cheap – that’s what they’re paid for – but cheap isn’t enough for a long-term bull market to take hold. No, stocks need to be dirt cheap for that.
This bear market, awful as it has been, hasn’t yet seen the real despair (or “revulsion”) that usually heralds recovery. Investors haven’t turned away from the market as it has imploded: instead, the worse things have got the harder they’ve searched for “bargains”. Until they stop doing that, and until they stop thinking every weed is a green shoot, all rallies should be treated as bear market rallies, not as recoveries. Sell in May and go away? I’m not sure I’d wait that long.
Finally, note that if you were one of those who thought that, with the collapse in both sterling and interest rates, it might be a good idea to buy into the high end of the London property market now, think again. With Mr Darling’s new 50% income-tax rate for those earning over £150,000 in place, the UK will have one of the highest top rates in the world – after the likes of Denmark, Sweden and the Netherlands. That won’t make London the kind of place highly-paid house buyers much like to live.