Spring’s blue skies hint at less troubled times

Are things getting better? Consider a few of this week’s headlines.

The IMF says the world economy will grow by 4.2% this year, more than it predicted three months ago; sterling is staging a nascent recovery against the euro and holding its own against the dollar; latest figures show average earnings and house prices on the rise; consumer spending is surprisingly buoyant; and Punch Taverns, Britain’s biggest pub owner, has reported its most encouraging results for three years. So can we look forward to better trade and increased profitability?

In overall terms, probably. Most companies are leaner and fitter as a result of their weaker competitors failing.  But on the negative side the fight for custom has never been keener and there are clouds forming on the horizon.

After a sudden surge in employment to 2.5m at the end of February, the public sector is braced for job losses when the new government wields the axe on “waste”; some economists reckon that could cost a further 400,000 jobs by this time next year.

That is leading to predictions that average earnings, which rose by 3.2% in the three months to February, could go into reverse, with one respected forecaster predicting real earnings will start to fall later this year.

As Wednesday’s figures underlined, inflation has increased rapidly to 3.4% and is expected to top 4% before it starts to fall again. More worryingly for consumer spending and company finances, the Bank of England is firing warning shots that its base rate cannot remain at 0.5% indefinitely.

It may not change for a few months, but extra financing costs will hurt companies and mortgage holders. On that front, most economists are warning that house prices have risen too quickly and could well suffer a downturn later this year, issuing a jolt to confidence.

And what of the drinks sector itself? It is an historical fact that spending on alcohol tends to fall in real (after inflation) terms as the economy emerges from recovery.

One prediction is that real spending on alcohol and tobacco will fall by 4% this year despite actual turnover rising by more than 5%, indicating a continued squeeze on margins. But less gloomily, spending in hotels, pubs and restaurants, which has been one of the major sufferers during the recession, should increase by about 1% in real terms this year simply because it has already reached a floor.

But what may throw the growth of consumer spending into reverse is a potential rise in VAT to help reduce the government’s massive deficit. An increase to 20% is widely expected despite manifesto promises.

There are holes in all clouds, so not everyone gets wet. But the prudent are making the most of this spring’s bright skies. They may not last much longer and the caveats accompanying latest results are not without foundation.

Finance on Friday, 23.04.2010