In my last post I talked about revisiting my trading strategy in order to develop a longer term approach to the markets.
Since then I’ve been busy researching all manner of macro-economic indicators in order to try and make sense of the economy and develop some longer term investment ideas.
Metrics such as employment numbers, GDP, CPI, RPI, house prices and repossessions all rank highly on the ‘What state is the economy in?’ question. These metrics paint a picture of an economy that is improving but has a fair way to go in order to be described as bullish. But they do appear to be trending in the right direction.
The GDP of the UK is estimated at GBP 1.41 trillion (More details here)
GDP forecasts for 2009 are -3.4% & +0.9% for 2010.
The Institute of Supply Management (ISM) publish reports monthly that many regard as the most reliable near term economic indicators available. Their NMI index suggests that over the last 6 months the US economy is improving (A number of greater than 50 is bullish).
Together with my technical analysis, my conclusion is that the economy is recovering – how long and to what extent this will be reflected in the markets is a question I have yet to answer.
I then decided to focus on the big economic story of the last couple of weeks – Public Spending Cuts. My findings were enlightening (to say the least!)
- At the end of August 2009 the Public sector Debt was £804bn – this represents 57.5% of GDP (Aug 208 Public Sector Debt was £633bn or 44% of GDP)
- The monthly deficit for August was £16bn (eg every month the Government is spending £16bn more than it is receiving)
- Tax receipts for 2009 are down 25%
- Government spending is up 11% (on stuff like Job seekers allowance etc)
- The IMF want to cut our Public Sector Debt by 6.5% (£42bn)
These statistics are very worrying to say the least, especially when you hear the Conservatives looking at measures that will cut £7bn per annum. This doesn’t even cover the monthly deficit!
So how is the deficit financed? Traditionally there are a number of ways;
- By raising finance through the issuance of gilts – Assuming the private sector and foreign governments still have faith in ‘UK PLC’ this seems the most obvious
- By raising taxes – But in an economy that has rising unemployment and a reduction is tax revenues, together with an election to contest, this seems unlikely.
- Through Quantitative Easing (QE) – Obviously the BoE have taken this route. The advantage of QE (given the current state of the economy) is that this should lead to inflation. Normally this is not desirable, but the alternative would appear to be deflation. Deflation stops an economy in its tracks. As the price of goods decreases, people are less inclined to purchase ‘now’ something that they can purchase at a lower price ‘later’. If QE really begins to take hold, expect to see that reflected in the CPI index. At some point this could also lead to an interest rate rise (in order to control inflation), which may stimulate foreign investment as the pound strengthens.
- By cutting Public Spending – From what I have seen reported, the political parties at present are paying lip service to the real issues. Neither party (Sorry Mr Clegg…) can come out with a really aggressive plan in light of the upcoming elections. So I would not expect to see this make a dent in the budget deficit for at least a year.
In my next post, I’ll discuss how this research is forming the basis of my investment plan.
For the time being lets consider this horrifying statistic.
In the time it has taken me to write this article (30mins), the Public Sector Debt has risen by £43m
