It was reported late last week that the United Kingdom’s economy continued to contract in the third quarter. GDP was reported to be down by 0.4 percent vs. the 2nd quarter. (FT/The Lex Column October 24, 2009) This represented a record sixth consecutive quarter of contraction, the longest since World War II. It was down 5.2% from the year-earlier period. (WSJ October 24, 2009) This contrasted with the eurozone recovery, where many are forecasting GDP to improve by 0.9 percent, largely fueled by a stronger recovery in France and Germany. Germany, in particular, saw its export business continue to show strong growth. The United States is expected to join the eurozone when it reports this week on its third quarter GDP. (WSJ October 24, 2009) We will most likely continue to see Sterling decline vs. the Euro and a weak U.S. dollar, as both governments look to encourage exports as well.
This clearly is another blow to Gordon Brown’s re-election prospects next spring. It should also serve as a warning to the Democrats in the United States about next year’s mid-term elections. The recovery in both the U.K. and the U.S. will be a business-led recovery. The consumer will remain on the sidelines, with a jobless recovery leaving unemployment in double digits in the U.S. With “home wealth” having disappeared, consumers will need to see the employment figures rise before they return to spending.
This means that business will need to lead the recovery in both the U.K. and the U.S. We are already starting to see improved earnings reports. In the technology sector, for example, both Google (GOOG) and Microsoft (MSFT) reported stronger than expected earnings this month. Tech firms are starting to see orders rebound and will be clear beneficiaries of increased capital spending in ‘10. Unfortunately, it has become fashionable for both the Labour Party in the U.K. and the Democrats in the U.S. to lambast big business and the institutional financial sector in particular, with continued calls to reduce compensation incentives. It is time for our political leaders to lead and to insure that the political climate fosters the growth that their constituents desire and deserve after the Great Recession of ‘09.