What to do as Britain’s economy falters

Facebook wasn’t the only flop this week. Britain’s economy also looks pretty shaky based on the latest news.

Yesterday saw the first fall in house prices in London for 30 months. Meanwhile, industrial production is falling and the Confederation of British Industry (CBI) trends survey revealed that firms think things are likely to get worse before they get better.

Then there were the awful results from bellwether retailer Marks & Spencer. Its pre-tax earnings fell 16%, the first fall in three years, and it has cut its sales targets. To cap it all, the International Monetary Fund (IMF) waded in with its own gloomy assessment.

But it’s not all doom and gloom for investors.

The IMF is worried

The IMF had a few things to say about Britain this week.  It used to think that the top priority was cutting the deficit. The latest figures made for pretty poor reading – the deficit has jumped from £9.1bn in April 2011 to £11.5bn.

But the IMF is now more worried about the lack of growth. As reported in the FT, Christine Lagarde, the IMF’s head, now thinks that “growth is too slow and unemployment, including youth unemployment, too high”.

Whilst the IMF is satisfied that the government’s austerity measures did enough to avert a debt crisis for Britain, policymakers and the Bank of England are being urged to leave the door open to more quantitative easing and further cuts in the bank rate (from its historic low of 0.5%) to get things moving.

Could we see more money printing?

Samuel Tombs of Capital Economics thinks that, “the door to more QE is still open”. The minutes of the MPC meeting earlier this month show that the bank is worried about the strength of the pound, weak global growth and problems in the euro area. Last September, just before it decided to buy another £75bn of assets, it was similarly gloomy. 

One paragraph hints that the BoE intends to take action very soon: “For several members, the decision not to expand the asset purchase programme at this meeting was finely balanced. The Committee would continue to monitor the outlook each month and further monetary stimulus could be added if the outlook warranted it”.

The latest inflation data will help the case of those who want more money printing. The rates of both headline and core inflation last month fell to 3% and 2.1% respectively. Although some of that drop was down to timing factors, it took inflation to its lowest level in two years.

And with oil prices down from their recent peak of $120 per barrel to nearer $90, and consumers still being battered by a combination of falling real wages and job insecurity, the headline figures shouldn’t spike anytime soon. So more QE could be on the cards before the end of the year. 

But the trouble is, money printing is just window dressing that will perhaps give the stock market another short-term boost. Where is that all-important economic growth going to come from?

Proper growth is a long way off

The answer isn’t clear. The public finances leave precious little scope for any significant boost to public spending. Tax revenues remain subdued and spending on benefits is still high. Meanwhile, private sector firms continue to hoard cash and fight shy of taking on full time staff. The latest jobless figures may have shown a fall in the number of people out of work, but the number of people in part-time work is at its highest level since 1992, while the public sector faces further cuts and the private sector is still nervous. With our European neighbours looking likely to implode one by one unless Germany acts soon, Britain’s economy is still facing massive headwinds.

A stock for tough times

One stock that looks set to power through the gloom is BSkyB (LSE:BSY). Sure it’s taken a hit recently thanks to the ongoing scandal rocking the Murdoch empire. But on a price/earnings (p/e) ratio of 14, and offering a yield of 3.5%, the broadcaster is good value. Higher revenues per user are coming through on the back of some extensive capital outlay on high definition and Sky+ boxes, and it’s a cash-generative business.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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