It looks as though Gordon Brown has managed to cling on to power, despite the dreadful election results.
It shouldn’t come as a huge surprise. Even if someone was willing to challenge him, the prospect of being Prime Minister of a recession-hit country for little more than a year is hardly the most attractive prospect in the world.
And it seems likely that Mr Brown will now cling on until the very last moment. His best hope is that by the time next spring rolls around, there’s been a rebound in the economy, and everyone will decide that he’s not so bad after all.
So is he likely to get his wish? And what does it mean for you as an investor?
Brown is clinging to hopes of a recovery
It’s small wonder that Mr Brown is clinging to hopes of a recovery by this time next year. There have been plenty of signs of a pick-up in the global economy, even here in the UK.
The housing market has seen further signs of cheer, reports the Royal Institution of Chartered Surveyors (Rics). In May, estate agents were still rather gloomy on house prices, but less so than in April – in fact, they were more upbeat than at any point since November 2007.
Buyer inquiries rose for the seventh month in a row, while sales picked up too, from 10.6 per branch in the three months to April, to 11.8 in the quarter to May. That’s still less than one sale a week, but it’s not collapsing any more.
However, this is the key point. Just because activity is not collapsing, doesn’t mean that things are suddenly turning around. As Rics spokesman Ian Perry put it, there’s a long way to go. “With the economic backdrop still quite uncertain, unemployment set to continue increasing sharply and finance for first-time buyers still in short supply, there are a number of significant obstacles to overcome over the coming months.”
An economic bounce is hardly surprising as markets defrost
Activity across the world slid sharply in the wake of the credit crunch. It’s easy to forget now, but at one point during the crisis, the world’s financial system was badly shaken enough so that even the most creditworthy couldn’t get access to money because no one was able or willing to lend it.
That pure fear has eased up now, so markets are defrosting enough that credit can at least function at the most basic level. So under those conditions, a bounce is only to be expected. As one of our Roundtable participants said recently, the global economy couldn’t have carried on crashing at the rate it did last year, because there’d be no economy left.
But despite the best efforts of central banks and governments, we’re nowhere near the easy money conditions that caused the crunch in the first place. And we won’t return to them either.
Although housing may be rebounding from a very low base, it’s certainly nowhere near enough activity to fuel further house price rises, particularly not from current levels. And other economic data is less encouraging.
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Retail sales in May were worse than expected, falling 0.8% on a like-for-like basis, compared with a massive 4.6% jump in April. The British Retail Consortium said that “the turnaround in sales of big-ticket items, such as furniture and large electricals, which would indicate real change in the mood of customers, still eludes us.” Meanwhile, one in ten businesses plans to cut jobs between July and September, according to The Times. Hiring intentions are at their worst since 1992.
With concerns hanging over job prospects around the country, people are right to be careful with their money. And these concerns won’t just go away.
If recovery does take hold, more problems await
Because there’s another problem. If a genuine recovery takes hold, then suddenly the focus switches to what the Bank of England should be doing about all the money it’s pumped into the economy. One way or another, this has to be dealt with. If inflation starts to pick up, then the Bank will have to start sucking money back out of the economy by raising interest rates for example. The big fear for now is that the Bank will do this “too soon”, and that the money will turn out to have been the only thing propping up markets, resulting in another crash.
But an equally big worry – and judging by the recent history of independent central banking, one that’s more likely – is that the central banks will let the money ride for too long, spurring inflation. That might be a more acceptable outcome for the heavily indebted and the government, but it’s not great news for the economy either. Stagflation – where the economy goes nowhere but prices soar – is the grim possibility on this front.
Regardless of what happens, Mr Brown has little to lose by hanging on in there in the hope of a recovery. But I suspect he’ll be disappointed – a year is more than enough time for more voters to lose their jobs and for markets to realise that this slump isn’t just going to go away painlessly. In the meantime, we’ll be stuck with a hamstrung, unpredictable government, unwilling to get on with things that might help, such as tackling the deficit.
So what should you do with your money now?
For now I’d still be sticking with defensive stocks with decent dividend yields (you can read about some here in our recent cover story – Has the worst of the stock market gloom blown over?) and ignore anything exposed to the UK consumer unless you’re a trader. As for the pound – it has picked up in recent months, but I suspect it’ll have a very choppy ride between now and the next election whenever that might take place. We’ll be looking at some currencies with brighter outlooks – and how to trade them – in this week’s issue of MoneyWeek, out on Friday. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
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