News from the City - 2nd October

During September the FTSE 100 broke through the 5,000 mark, and while it cannot be said that it continued into broad sunlit uplands, nonetheless a gain of 4.7% was recorded for the month.  Recently poor US manufacturing data and tumbling auto sales have contributed to a muting of optimism about the recovery.

That we can talk about a recovery is thanks to the $1 trillion stimulus package agreed at the London G20 in April.  The latest round at Pittsburgh this month will probably be remembered more for its administrative effect than any substantive policy measures – countries like Brazil, Russia, India and China were given a permanent status in the Group, effectively ending the old G8 model.

On the domestic front, although the property market continued to rise gently, latest data from the Council of Mortgage Lender showed that the number of mortgage approvals fell while the level of personal debt rose again to £1.4 trillion.  If the financial crisis and economic recession are the consequence of excess debt, this data is not encouraging for long term growth.  Added to this the total debt of the UK including personal, corporate, banking and Government (once state pension liabilities are added in) is now 700% of GDP (Gross Domestic Product).

It seems improbable that the next Government will not be forced to cut public spending and raise taxes.  The really important question for the economy, however, is how long the Bank of England (BoE) maintains the Asset Protection Scheme, or quantitative easing (QE) to give its more familiar name.  If it stops QE too soon, it risks the economy not having enough traction to pull itself out of recession, leading to the dreaded ‘double dip’.  If it leaves QE in place too long, however, then it runs the very real risk of bumper inflation.  And if it looks like it doesn’t know what it’s going to do, then the market and foreign investors will head for the door.  Tough times still for UK Plc.

James Davies – Investment Research Manager

Source: Financial Express Analytics, BBC Online, Reuters, Council of Mortgage Lenders, Fidelity International (from Institute of Economic Affairs)