Best Financial Markets Analysis Article The big news from an economic prospective was the recent ONS revision to UK 1st Quarter GDP data from a contraction of -1.9% (April 09) to now -2.4% . The response in the mainstream media was virtually unanimous, shock and horror at the degree of contraction in the 1stQ which is the worst since 1958. However what the mainstream media have failed to comprehend is that the effect of a significantly lower 1st quarter GDP sets the scene for a lower base from which the economy can recover, as the NEXT FOUR quarters will show a GREATER BOUNCE in the data released in the run up to the May 2010 GENERAL ELECTION as I elaborate upon in this article.

Engineering an Election 'Winning' Economic Recovery

The forecast date for the next General Election as of October 2007 has been for May 2010, with the projected seats implying a small Conservative victory of a majority of 36. Clearly all is not lost for the Labour government, therefore the primary aim now is to reduce this projected small majority by as much as possible if not to totally eliminate it, to achieve this the government has thrown ALL of the fiscally responsible rules out of the window starting last October having embarked on a programme of maximising the number of seats Labour will retain at the next general election. One of the key milestones set by the Prime Minister Gordon Brown of achieving this objective is in successfully and publically achieving a strong economic bounce into May 2010. My on going analysis confirmed a bounce into a May 2010 general election as long ago as February 2009, with more recent analysis confirming this outlook (UK Economy Set for Debt Fuelled Economic Recovery Into 2010 General Election)

The existing GDP forecast for the UK economy is for a bounce into late 2010 in advance of a double dip recession during 2011-2012 as the below graph illustrates.

The existing GDP quarterly projections are -

GDP by Quarter	Quarterly	Annual
Q1 - 2009 - Published Late April 09	-1.9%	-4.04%
Q2 - 2009 - Published Late July 09	-1%	-5.05%
Q3 - 2009 - Published Late Oct 09	-0.35%	-4.75%
Q4 - 2009 - Published Late Jan 09	+0.6%	-2.65%
Q1 - 2010 - Published Late April 10	+0.7%	-0.05%

Therefore the economic forecast implies that the UK economy would just be emerging from recession on release of GDP data in April 2010, by recording 2 quarters of economic growth, however still recording negative GDP on an annual basis.

Impact of the amended first quarter GDP 2009 data to a contraction of -2.4% from -1.9% is:

GDP by Quarter	Quarterly	Annual
Q1 - 2009 - Published Revised June 09	-2.4%	-4.54%
Q2 - 2009 - Published Late July 09	-.5%	-5.05%
Q3 - 2009 - Published Late Oct 09	-0.35%	-4.75%
Q4 - 2009 - Published Late Jan 09	+0.6%	-2.65%
Q1 - 2010 - Published Late April 10	+0.7%	+0.45%

The effect of the 1st quarter GDP revision is in effect to SHIFT 0.5% of contraction backwards and out of the total for the next 4 quarters and therefore give the economy a more significant implied bounce into a May 2010 General Election as illustrated by the above table that would show 2 quarters of economic growth + approx 0.5% of growth on an annual basis and therefore sending a clear signal to the electorate that the recession is over. There is also the chance of a further +0.5% to be SHIFTED into the period to 31st March 10 to give an even stronger perceived economic recovery just in time for the May election.

UK GDP data to be released later this month should confirm this revised GDP trend by recording a far smaller contraction for Q2 as indicated in the above table.

Unemployment

Unemployment is an extremely important element of the bounce back strategy, however the recent record surge in unemployment to 2.38 million is projecting towards a continuing sharp rise in unemployment towards mainstream consensus targets of between 3.2 million and 3.5 million. This is against my forecast of October 2008 (July 08 data) which forecast UK unemployment to hit 2.6 million by April 2010.

UK unemployment - July09

However as with the GDP data, we are seeing signs of the government attempting to engineer lower unemployment data (claimant count) in the most recent figures, those claiming job seekers allowance are actively being moved off of benefits onto programme's such as New Deal. Similarly the job less count whilst continuing to rise towards consensus ranges of upto 3.2 to 3.5 million. However I expect the peak in unemployment to come in significantly lower and much sooner than the mainstream are forecasting, i.e. to give several months of positive unemployment data into the May 2010 general election perhaps resulting in a rate declining to the original target of 2.6 million by April 2010 rather than the high mainstream projections -

Telegraph - The British Chambers of Commerce reiterated its forecast that unemployment will peak at 3.2m.

Guardian - The economy seems set to shed jobs well into 2010 and unemployment seems more likely than not to reach 3 million.

Swine Flu Spanner in the Works?

The press is running with headlines of 65,000 deaths accompanied with 1 in 8 of the work force off sick, IF anything near this materialises than this will impact on the economy, therefore probably negating the 0.5% GDP SHIFT to the 1st Q.

Politicians Hiding the Truth from the Electorate

Both main political parties continue to hide the truth of deep public spending cuts that will be forced onto the next government due to the huge amount of borrowing. The huge annual budget deficit of more than 12% of GDP ensures that the debt burden will continue increasing well past 2015, which demands extreme measures in the form of deep public sector spending cuts in an attempt to bring Britains finances back under control as the consequences of not doing so could result in a lost economic decade much as Britain experienced during the 1970's.

This debt fueled economic recovery will be followed by a severe second recession to rival that of the current recession in terms of GDP contraction of between 5% and 6% and which therefore implies a far worse outcome than the double dip recession that has in recent weeks begun to become the consensus expectation in the mainstream press, which I first referred to in February 2009.

My next in depth analysis will look at UK deflation / inflation and the prospects for UK Interest rates, to receive this in your email in box ensure your subscribed to my always FREE newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

david f
08 Aug 09, 15:01

UK economic recovery ?

Er i dont know where you get your figures from? I can beleive a recovery will come towards the end of the year as the economy cant just keep contracting at this rate (in effect three years of normal growth lost in just one!) for long...unless we enter a deflationary spiral such as Japan. If we recover i agree there will be a second recession but i suspect it will be milder (around say 1-2% contraction) caused by the necessary reigning in on spending to cut the deficit though agree it could be a lot faster if you take into account the sorts of cuts likely (ie 10-20% floated). Political? I take it you mean the VAT cut but that only added a mere 10bn to the total debt (out of 1Tr or so...will anyone notice??). The quantative easing i doubt is poltical, more essential to prevent bankrupcy by preventing high interest rates on govt bonds. Luckily the govt has got away with a high defict in part due to the relativly low debt level at first (aprox 35% compared to say 60% in EU, but there was a deficit when we should have had a surplus!) AND low global inflation unlike the 1970s when they had high defict AND high inflation...an odd combination which is why uk went bankrupt.

I dont know what you suggest they should do differently? Obviously there is ALOT they should have done to prevent it occuring in the first place ie banking regualtion rubbish, budget defict to high etc BUT the knee jerk response i see argued (ie slas spending now) is incorrect. This was tried in japan..the result? Still in recession AND STILL with a huge defict (and debt for their children!! what a combination!) had they not been so agressive with fiscal policy, japan would have recovered and its total debt would be lower. Yet that is exactly the "cure2 that everyone on these posts asks for?

Have no understanding of economics and no understanding of history...balancing books in a recession to try to cut debt NEVER works...not only does it make a depression (which never ends), but it also makes more debt in the long run (ie is counterproductive!). That said you are right in saying that the VAT cut had almost zero effect cos it was too small as a percentage of GDP and would only have worked if the recession had been much milder (in fairness they didnt know the economy would contract by say 5%...no one knew apart from the doom merchants who this time got it right).

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