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Saturday, 24 January 2009

When will the global recession end?

It came as no surprise yesterday that the UK is now officially in a recession. With the economy shrinking in the third quarter of the year, the economy certainly hadn't improved in the final three months of the year. The economy contracted by 1.5% in the final quarter of the year, having shrank 0.6% in the third quarter.

These figures confirmed that despite the government's attempts to stimulate the economy through measures such as a cut to VAT and capital injections into the banks, and the Bank of England's historic interest rate cuts, the economy shrank at an accelerated pace.

Like the USA, Japan and the eurozone, which were confirmed as in recession at the end of the third quarter, the UK is now officially in recession, and is unlikely to emerge from recession for some time.

Historically recessions tend to last about fifteen months, but given the global nature of this recession and the severity of the economic imbalances in the UK this recession could last longer. It will almost certainly be longer before the UK returns to its natural rate of economic growth (approximately 2.5% per annum).

Given that the USA is further through its recessionary cycle than other economies, it is likely that they will emerge from their recession before other parts of the world. The country also has the capacity to spend its way out of this recession. Given the massive fiscal stimulus planned by the new Obama administration, this could pull the US out of recession by the middle of 2009.

Increased optimism following the election of President Obama should also help to stimulate the economy as consumers feel positive enough to spend and businesses prepare for an upturn. This break from the old could have a significant impact on the economy.

The eurozone and Japan are likely to follow the United States. Once the US starts to grow again global demand and global confidence is likely to improve. Japan and eurozone countries like Germany rely heavily upon exports and therefore global demand is fundamental in their economic revival.

These countries also benefit from having less consumer debt and fewer economic imbalances (e.g. house price over valuation) than countries such as the UK and USA. Therefore the downwards economic cycle should have less corrections to make before stability returns. Less personal debt and higher savings will mean that consumers in places such as France and Germany will be able to benefit from falling prices, prompting an increase in consumption that will aid the recovery.

The UK is likely to be one of the last developed countries to come out of the global downturn. It faces a number of problems that will prolong the correction in the economy. For one the UK economy relies heavily upon global finance as a proportion of GDP and as an employer. Therefore with this sector in chaos the economy has been hit hard.

Secondly UK households do not have a massive amount of savings to protect themselves through the economic slowdown. Having spent heavily and saved little in previous years the UK consumer is likely to sharply cut consumption in order to build up protective savings. This will reduce retail spending, a key part of the economy.

Third, with the UK government attempting to support the banking sector it has built up a massive debt. Like the UK consumer the British government did not save in the good years and therefore does not have a surplus available to add much extra stimulus to the economy.

Finally, UK house prices were some of the most over valued in the developed world and as a result will need to fall further than in other countries. This will again weigh on consumer confidence and will also hit bank balance sheets.

This is not to say that the UK will be in permanent decline. The rapid weakening of the pound will stimulate exports from the UK. This will take some time to occur as the world economy slows and as international importers adjust their supply chain to the UK.

The UK also benefits from a highly skilled and flexible labour market. Unlike some European countries the UK's labour laws encourage the use of temporary workers and place less barriers to employment. They also allow employees to be sacked or made redundant more easily. Although not a great thing if you are one of the people losing their job, but it will mean that British businesses can reorganise and cut costs more quickly and cheaply than other countries.

Finally the Bank of England has cut interest rates quickly and will continue to cut to near zero. Along with quantitative easing ("printing money") this will act as a further stimulus.

In all these countries, particularly the USA and the UK, the way out of recession will require the banking system to move back to some sense of normality. This is not going to be easy and could be some way off. Without it though, businesses will continue to be unable to borrow and therefore invest and consumers will be unable to get mortgages or loans to buy houses, consumer or start entrepreneurial activities.

So as it stands here are my forecasts for when recession will end (i.e. first quarter of positive growth):

USA - Q3 2009

eurozone - Q4 2009

Japan - Q4 2009

UK - Q1 2010

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Sunday, 11 January 2009

Jobs news summary for the week

UK governments plan to create more internships - The UK government is planning on giving unemployed graduates three month paid internships as a way of increasing skills, work experience and reducing unemployment.

Banks keen to employ graduates - Banks are keen to continue to employ the best young graduates whilst continuing to cut the jobs of more experienced staff. Graduates are proving attractive to banks as a cheap source of labour that will be available and ready for when the markets recover.

Help for long term jobless - The UK government announces plans to tackle long-term jobless, i.e. those unemployed for over six months. Unlikely to be a significant change in policy as tackling long-term unemployment has been a stated goal of the government since 1997.

Obama jobs stimulus plan - It is estimated that Obama's fiscal stimulus could create four million new jobs. It is hard to see how this figure has been calculated and will almost certainly be way off.

US unemployment increases to 7.2%, half million jobs lost in December - US unemployment surged to a 16-year high of 7.2 percent as a deepening recession pushed employers to shed a massive 524,000 jobs in December, capping a yearly loss of 2.6 million, data showed Friday.

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Wednesday, 7 January 2009

Employee demand falling at a record pace

A report published today by the Recruitment and Employment Confederation (REC) and KPMG showed a sizable weakening in the labour market and the demand for employees.

According to the press release that accompanied the report...

...For the third consecutive month, recruitment consultants reported declines in permanent and temporary staff pay during December. Anecdotal evidence suggested that rapidly rising levels of staff availability had diluted candidates’ bargaining power.

Reflective of recent redundancies and fewer job opportunities, the availability of staff to fill vacancies continued to rise substantially in December. The latest improvements in permanent and temporary staff availability were the strongest since the inception of the survey in October 1997.

Kevin Green, Chief Executive of the REC, said:“These figures are deeply worrying and show that the contraction in the labour market is now rapidly accelerating. The decline in both permanent and temporary appointments in December is the sharpest recorded since the survey began in 1997.

“At a time when the Government is proposing job creation measures, the REC will be seeking urgent meetings with the Government about its proposed removal of the VAT concession in April. This change could help retain 150,000 temporary jobs at a time when we should all be working together to create employment opportunities, not taxing them out of existence."

Mike Stevens, Partner and Head of Business Services at KPMG, added: “These latest figures only serve to confirm the most pessimistic projections for the UK jobs market. They are also a lead indicator for a rapidly declining employment situation which is not yet reflected in the government's current employment statistics. One reason for this is that employment legislation – enacted since the last recession – tends to defer the incidence of job losses pending completion of consultation periods."

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More job losses on UK high street...

It’s not just those small companies or those that were already on the way down that are suffering at the moment. M&S announced today that they will be shedding 1,230 jobs in the UK and closing 27 of its small food stores.

It is not too surprising that M&S has been forced to make these cuts. The signs seemed pretty obvious well before today, as they announced 20% sale after 20% sale in the weeks running up to Christmas. Although the shops were packed on those sale days, it was a terrible indication of the state of the business.

This has not been a good week for those working in the retail industry...and its only Wednesday. On Monday Adams, which fell into administration after Christmas, cut another 850 staff, while Passion for Perfume collapsed leaving 185 people jobless. Whilst just today the womenswear company Viyella called in the administrators, putting at risk another 450 jobs.

Things are only going to get worse on the high street in the next few weeks and months. It seems now seems even more important than ever that the government stops playing politics with policies such as VAT cuts, and focuses upon the problems in hand. First step for retailers, get the credit insurance market working asap.

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Monday, 5 January 2009

US job losses highest since end of WWII

Friday sees the release of the US Labor Department's monthly jobs data which is likely to show that the number of jobs lost in in the US during 2008 was the highest since 1945.

According to the median estimate of economists surveyed by Bloomberg an additional 500,000 jobs were lost in December, resulting in a cumulative reduction in headcount of 2.4 million in the year.

Despite Barack Obama's grand plan for an extensive fiscal stimulus, the US economy will continue to slash jobs throughout at least the first half of 2009 and for possibly longer.

The unemployment rate, which stood at 6.7% in November, is likely to have climbed to 7% in December, the highest level since 1993. It would not be surprising to see this figure edge towards double digit figures especially if the fiscal stimulus and cuts to interest rates don't have the desired effect.

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Sunday, 4 January 2009

Graduate recruitment - Banks becoming more selective

Graduates looking for work as an investment banker or other highly paid jobs in financial firms will find it increasingly difficult to find the jobs they want if they are not attending some of the most high profile universities in the UK and the rest of the world.

According to an article in the Financial Times banking and financial institutions are slimming down their recruitment process, focusing upon a select number of universities.

In the past these firms would attend recruitment fairs and hold special recruitment sessions in at least the top twenty (Russell Group) universities in the UK. They would also target graduates in other universities with highly recognised finance and economic departments.

However, with fewer jobs to offer, smaller recruitment budgets and less competition for the best candidates, financial firms have dramatically cut back on their recruitment activities in those universities that they do not consider to be the best in the country. As a result those candidates in even some of the best universities in the UK have a significantly reduced chance of gaining employment in the sector.

The Financial Times identified the following universities as the places to be if you wish to gain employment in the financial sector:

Places to be:

● Inner circle (where most banks are searching for recruits)



Imperial College London

● Outer circle (where some banks are recruiting)

London School of Economics

University College London

Warwick University

This is not to say that you can't get a job as an investment banker if you are graduating from somewhere else, however you are unlikely to be directly targeted by the bank and are starting one step behind.

FT article: Banking graduate recruitment

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UK Treasury further recapitalisation of banks

Sources close to the UK Chancellor, Alistair Darling, have suggested that he is considering further measures to boost the banking and financial system in the UK. This gives a clear indication that although we have had a bit of a end of year lull, there remain many problems within the financial system.

One key problem is that banks have yet to start lending at a sizable enough level to support business activity.

It has been suggested that the Chancellor will set up a fund to buy toxic assets from banks or exchanged for government bonds. This should help to provide a boost in confidence as the concerns about the balance sheets of other banks and financial institutions are nullified by the government effectively taking away risk.

If these measures do happen, it will be good to see the Chancellor taking a pro-active approach in helping to boost the economy. This will be a useful and practical step which will have real benefits to the whole economy, unlike the costly and pointless cut in VAT.

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Friday, 2 January 2009

Economic outlook 2009 - many different view points

An article released yesterday in the Financial Times shows the extent of the economic uncertainty that exists at the moment.

The paper sent a survey to leading UK economists asking broad questions about the outlook for the economy, employment, house prices, government spending etc.

The paper printed the responses from the various experts, and in typical economist fashion they came up with very different views for the economy.

For example, when asked whether 2009 would show the first "green shoots" of recovery in the economy, there was an almost even split between those answering yes and those answering no. Looking closer at the responses given the reasons for the responses were also very different.

Often the survey also seemed to suggest different interpretations of various economic terms led to different survey responses. For example, some respondents defined economic recovery as recording positive growth and others thought it meant seeing a return of trend growth. These are significantly different with the later being much harder to achieve.

This article has helped to confirm that we are entering a very uncertain time. I remain hopeful that we will see the first signs of recovery before the end of the year, but so much could happen to put this out of reach.

You may have to register with the FT web site (for free) but its worth having a read of this article.

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