Tim Price of PFP Wealth Management talks to Shaun Cumming about the prospects for the British economy.
Q. What are your views on the fall in Britain’s GDP in the fourth quarter?
A. I think that they should have been a terrible shock to everyone. There are people who will try to put a positive spin on the situation, but it is obviously a terribly bad set of figures from whatever way you look at them.
This could conceivably be the first evidence that we are moving towards some kind of double-dip recession. I certainly wouldn’t write it off as just one set of bad figures either and I think there is a reasonable chance that the next first quarter results will be much along the same lines, which would technically mean that we are there.
Q. Does the situation worry you?
A. Yes, but from our perspective we do not tend to conduct much in the way of micro-analysis when these statistics are released. What we try to do is to look at client portfolios and in particular equity type risks. So, although we are mindful of the broader economic environment we look for investments that are going to hold up irrespective of just how bad the economy is.
These figures do not have such an immediate impact on us – we have seen that it has not been the best situation for a while in the United Kingdom.
Q. Do you think the weather affected GDP as much as has been argued?
A. It most definitely did. We have two offices – one in London and one in Harrogate, North Yorkshire. Having travelled between the two during the bad weather, I have seen how the transport infrastructure of the country basically ground to a halt for a long period of time.
We also had some anecdotal evidence from several clients who said that they were snowed in, which meant that during those times there was little economic activity. It doesn’t surprise me that some people are blaming the weather, at least partly, for the poor GDP results. For several weeks it was not business as usual. (Q&A continues below)
Q. Why did some sectors do well and others so badly?
A. I am maybe a little surprised as to why financial services would take such a drop, but there are obvious reasons why things like construction have been badly affected because it is that much more difficult to get that kind of work done when winter weather causes havoc. Of course, these problems are then compounded by transport failures. It is also no particular surprise that retail businesses, hotels and restaurants suffered.
Manufacturing has been the biggest positive surprise generally during this weak economic period. I would think in large part that it is due to the effect of sterling declining. The one sector that benefits from this is export-focused manufacturing.
Q. Is Britain heading for stagflation?
A. I think we are already there. How else can you describe soggy headline economic growth with stubbornly high retail prices. Much of the inflationary pressure that is out there is not domestically driven. It has been created by higher worldwide prices for food, energy and oil.
We have been discussing it internally for some time. From an investment market perspective, it makes it a particularly tough environment for UK government bonds. If inflation stays close to this level or worse, goes higher, then it will be a complete disaster.
Q. What did you think of the government’s response?
A. They do not have a choice but to continue with the planned austerity programme. Their priority is returning the national debt towards balance, and to be fair they have been consistent towards the programme in the face of a growing chorus of disapproval from public sector unions. It does not change their focus even though there will undoubtedly be naysayers who will tell them that they are progressing with the cuts too quickly. They really do need to work at cutting the deficit.
Q. What impact could government cuts have on GDP figures?
A. You could argue that this would cause GDP to continue falling but there is more to life that straightforward economic growth. If we require growth to finance debt, then our view would be that the government is right to rein in spending. It happens to be doubly unfortunate for them that it comes at a time of severe economic stress, but I’m not sure if they really have an alternative.
Q. Do you think a double-dip recession will really come?
A. As a betting person I would have to say that we will likely face a double-dip recession. Because of the underlying inflationary pressure it is difficult to see how this is anything other than a bear market for government debt, and by implication corporate debt too.
I cannot see the unemployment picture changing either. The private sector is normally first to adjust the payroll as the economy slows down, but the ball has also been passed on to the public sector and you have to presume there is only going to be bad news to come in terms of job losses. I find it difficult to be upbeat about the situation.
Q. Can you see improvements in 2011?
A. China is an example of a large economy that, if it were to overheat, might be good for the UK. But on the other hand that would have an impact on economic growth so it is not an easy one to call. It strikes me that the logical conclusion to come to is one that requires a defensive outlook. It is much easier to see a lot of already bad news getting worse.
Q. What does it mean for investors?
A. We are investing outside the UK and G7 and into markets where national finance is in a better position. We will be backing more international businesses that have no particular domestic orientations in the United Kingdom. This is a system that should generally thrive despite the recessionary climate.