Aidan Bailey of THE FRY GROUP paints the current financial picture for the UK and international markets.

Some weeks ago Newsweek ran the headline “The End of the Euro”, which, in my opinion, should be taken with a pinch of salt. In August 1980, TIME magazine’s headline read “The End of The Equity Cult”, when in reality the Dow Jones Industrial Average in the US was at 1,000 and just about to commence the greatest rise in its 200-year history!
          It’s still very early to predict anything about the new Tory-Lib Dem pact, although they have started on the right foot following the demise of Gordon Brown’s Labour government, whose stance on the economy was considered by many as being too fragile to risk making cuts and has been referred to in some quarters, “as illogical as continuing to feed an alcoholic more alcohol, for fear of the trauma of detoxification.”
          Presently, the main worry is the proposed goal of a £6 billion spending cut, which may not be sufficient when a figure at least 10 times more is needed. However, managing the economy is tricky business. Too little action and financial markets might lose confidence, too much and a “double dip” recession may occur.
          According to some, the UK economy should be relatively easy to turn around by redirecting to the productive sector the circa 5 percent GDP currently pumped into the public sector. In reality this means laying off 500,000 to 750,000 workers and increasing general efficiency. Such a major culture change is not easy and can’t be accomplished overnight.  

          Member of the Bank of England’s Monetary Policy Committee, Adam Posen takes a more somber note, stating that although Britain and the US are unlikely to face repeated recessions, their plight is scarier than Japan’s. In Posen’s view, Britain faces an uncomfortable trio of obstacles, none of which plagued Japan in the 1980s or 1990s.

·         Unlike Japan, Britain has to sell a large proportion of its debt to overseas investors, who are more likely to exit the market if they become nervous with Britain’s fiscal prospects.

·         The UK faces the challenge of having to boost a troubled manufacturing sector if it’s to recover sufficiently. That said, a devalued Sterling is an advantage in that regard.

·         The banking system’s continued troubles would undermine companies’ abilities to raise funds. Businesses already appear to be hoarding savings – something which happened in Japan.

            According to RBS Credit Strategist Andrew Roberts, the world could be heading for the Great Depression II. Albert Edwards of Societe Generale expects some years of deflation, followed by hyperinflation as countries monetise their deficits. We certainly seem to remain in a period of uncertainty.

Aidan Bailey BA (Hons) CertPFS AWP^CM 

General Manager Singapore, International Division