Is the financial crisis really over?

   Shake off that New Year hangover; it’s time to party.  After two and a half years of unmitigated gloom, economists and commentators are entering 2011 full of optimism. At least,  the 78 business analysts and economists polled by the Financial Times this week are.  They’ve concluded that there is no double dip recession and that we are on the way to an export-led recovery that will astonish Europe and gob-smack the G8.  Forget sovereign debt crisis, bankrupt banks, inflation, they’re history.   The stock market is booming, growth has returned and manufacturing orders are storming ahead thanks to the low pound. 

    Now,  they don’t call it the dismal science for nothing - economists are usually pessimistic to the point of self-harm. So why are they suddenly looking on the bright side or is the Financial Times on the waccy baccy?   Well the short answer is that the City of London is making serious money again.  Zero interest rates and the fear of governments defaulting on their debts, has suddenly made the stock market look a relatively safe bet.  Money has been piling out of  bonds and into equities, pushing the FTSE index of leading shares back up to 6,000 over Christmas - up nearly a quarter since the recession bottomed.  This makes financiers very happy because they rake in large sums in commissions from buying and selling shares.

     Moreover, the banks who caused the economic crisis seem to have got off scot free and are back handing themselves huge bonuses thanks to that £1trillion bail out they got from the taxpayers. So they're happy However, this doesn’t mean that the banks are lending again and  small businesses are still going bust at an alarming rate. And if you look at the real economy, as opposed to the looking-glass world of the City of London, things don’t look anything like as rosy.    I don’t know about the Financial Times economists, but for most of us 2011 will be all about inflation, pay freezes, job losses, debt and negative equity.

   The Bank of England has missed its 2% target for twelve months straight.  When central banks lose the plot, things rarely go right, so you might wonder why the financiers seems so relaxed about this.   The answer is that businessmen really only worry about inflation when workers react by demanding higher wages.  This hasn’t happened - at least not yet.   Workers in the private sector have seen their earnings fall in real terms for two years, and they will continue to fall in 2011.  Such is the fear of unemployment, many are grateful to have any job at all.  A million more employees are on short time too, which is good for the unemployment figures, but bad for anyone raising a family.  

  The of industrial discontent has emboldened the government to take more risks with inflation by bumping up VAT permanently to 20%.  This will hit lower income families hardest - whatever the Chancellor says - and will increase prices at the same time as helping put another quarter million on the dole this year. That’s the forecast  according to the Chartered Institute of Personnel and Development,  who say that 2011 will be the worst year for jobs for 17 years.  Not much champagne flowing there.  

   Indeed,  inflation is growing so rapidly that eventually even the Bank of England’s narcoleptic governor, Mervyn King, will have to wake up and smell the oil.  The International Energy Agency is warning that the price of crude will rise this year to $100 a barrel.  This doesns’t just mean that petrol will stay at levels which only a few years ago would have had the road hauliers blocking the motorways.  Double digit fare increases are sweeping the country and utility bills are rocketing, though you need a maths degree nowadays to understand them.   Oil affects every price, including food because it increases fertiliser and transport costs.  And for the first time that most of us can remember, shoppers may have to start changing their eating habits in 2011, because food prices are going through the roof. According to the British Retail Consortium, food price inflation was rising at 9% last year, and world food prices have this month risen to a record high, according the United Nations.  

     House prices are falling and will continue falling throughout 2011. Now, this is actually a good thing.  British property prices are ridiculous and a correction is long overdue.  An entire generation of first time buyers has been locked out of home ownership.  But in the meantime we will be reading a lot of headlines  negative equity - people who have taken out mortgages they couldn’t afford and are now living in houses they cannot sell - at least not at a price that can match that 125% mortgage they took out back in 2007 from Northern Rock.  The sluggish housing market depresses retail sales because people stop spending their weekends in B and Q and John Lewis buying stuff for their new homes. 

   One reason house prices will continue to fall is that interest rates will almost certainly rise in 2011.  Everyone seems to have forgotten in the post New Year euphoria that UK interest rates are at their lowest rate for three hundred years.  A doubling of interest rates is already being “priced in” to use the jargon, by banks who are stealthily increasing lending costs. Then, of course, there’s the public sector cut backs that haven’t really started yet, but which will hit the unemployment figures in 2011.   We may not see workers on the streets like in Ireland or France, but eventually people in Britain will start to react against the cost of living increases.  

  Finally, the FT economists  seem to have forgotten about the sovereign debt crisis that is still raging through Europe.  One reason for the stock market bounce is that investors don’t think their money is safe any more in government bonds.  As money piles into the stock market, it will be even more difficult for countries like Portugal and Spain to service their humungous debts.  It will mean more EU bail outs and cut backs and the likelihood that at least some member states will have to default on their debts.  

  So there you have it. But, hey,  it’s not doom and gloom. Wills and Katie will be getting spliced, and I’m sure the Royal wedding will make it all better. Happy New Year.