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Stephen Archer is a speaker with great charisma. By using illustrations and personal experiences and not being afraid to share his own point of view of the current situation and who is to blame for it, he engages the whole audience, at the same time helping us all to understand the credit crunch a little better.

— Warwick Business School

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2011 – Predictions

Economic and Business Predictions for 2011

UK and Global

Growth

I am forecasting circa 2% in the UK on the basis that 2011 will see some unwinding of debt though not enough to fuel GDP, quite the opposite as credit remains tight. We should in fact be content if growth is over1.5%. Over 2.5% will be very good. We are one of the safer EU economies. Inward investment (vital) should increase as should exports as the global economy shows genuine recovery and the pound stays relatively depressed. The UK will look like one of the better economies to base a business in.

Double dip?

No, there will not be one; the fragile UK recovery and the stuttering US recovery have served to undermine confidence and drive investors away from equities to treasury bonds, gold and other safer havens. However, corporations are generally performing well and certainly far better than a year ago as evidenced by late enthusiasm for equities at the very end of 2010. Even the airline industry looks healthier. Cash piles are also being amassed in the corporations. The cash pile in US large businesses is around $2 trillion – enough to effectively wipe out the US national deficit.

So might we get a second dip?  Consumer demand remains moderate and many are still reducing debt and those that have cut personal debt are being more cautious. In the US, recovery has brought about a sharp increase in imports and a very unhealthy negative trade balance in 2010.  Confidence in the government’s ability to manage the recovery is shaky.

None the less, the only likely cause of a second will be a climate of self fulfilling prophecy. Every one becomes a little more cautious and as a result most indicators go the wrong way. Even this will only cause a more of a blip, within the next three quarters. But as I have always said, the recovery will be bumpy (some call it choppy) and so we must not read too much into a new negative trend.

Inflation

I think Q1 will show 2.5 – 3%. It would be worse but retailers will show forbearance and swallow margin, ie VAT. Still, VAT, food, raw materials prices and uncertainties over Oil and Gas supplies plus some bullish pricing from many overseas producers from whom we buy goods will push inflation up.

Q2 may show some re-adjustments and a worrying rate of 3.5-4% or more. This will cause panic in the markets and Westminster but in my view this will fall back to 3% in Q3 and Q4. We should not worry about this too much. There will be wage driven inflation having had 2-3 years of locked down salaries.

Currencies.

Dollar down to $1.70 and the Euro down to 1.30 against sterling during 2011. The US dollar should, and I think will, be allowed (and encouraged) to float down to help its exports. Its current account balance is a disaster and I feel that Obama’s options are limited. China will not want to re-value the Renminbi and will not do so. One cannot talk too long about currencies without considering trade imbalances. China has yet to declare that it sees a risk in its vast trade surplus. I think that point may come in the next two years, but not too soon and not in early 2011.

The big question is over the Euro. Arguably this has been overvalued for some time. With a large part of the Eurozone in debt troubles, it is remarkable how strong the currency is. Two things can happen with the Euro. Firstly, against Sterling the Euro will fall 10% within the next 6 months.

We are witnessing the beginning of the end of the Euro as we know it. The model is fundamentally flawed (http://stephenarcher.eu/the-end-of-the-euro/) Logically the broke economies, the PIIGS, should exit the Euro in order to be able to devalue their way out of trouble. In reality, they cannot afford to do this with the bail debt that they now carry – so far only in the case of Ireland and Greece. No, the back may be broken by the political backbone of Germany that runs out of patience (and funds) with the feckless partners. Indeed, the German courts may do this before the electorate does.

Interest rates

No change until Q2 when it goes up 0.25%. Not a big jump but symbolically huge. This will be in response to the inflation level and will be seen by the outside world as a gesture of confidence in the economy on behalf of our central bank. If the 0.25% rise does not cause any adverse reactions then they may raise it by another 0.25% in Q3.

What’s going to happen in banking

Less than the public thinks – or hopes! Here is an area where there will be some softening of taxation plans. The political headlines and the execution detail will diverge somewhat. The Electorate despises the banks but they are vital to the UK economy and cannot be allowed to go offshore.

Quantitive easing

QE is inevitable in 2011. This is not a widely held view and it might get ‘re-positioned’ as debt swap or bond re-issue; the amounts needed are eye watering.op+

Banks all over the advanced economies face a huge refinancing challenge over the coming few years. Private sector funding will mature and state funding will need to be paid back. The total bank funding is at least US$5 trillion of medium to long-term funding maturing over the next three years.

United Kingdom banks will need to refinance or replace around £750 billion–£800 billion of term loans and liquid assets by the end of 2012. For this reason alone I think QE is inevitable in 2011.

SUMMARY

So 2011, no easy ride but no disaster either!


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  • Saa14

    What is your view, held by The Sunday Times, that blue chip companies will lead the growth in the stock market in 2011?

  • Stephen Archer

    I have little doubt that they will, however, the SME’s will fuel economic recovery and they will still have a tough(ish) 2011. Growth in the stock market does not equate to growth in GDP or the wider economy.

  • Saa14

    Yes, I agree. Interesting prediction for the Euro – are you suggesting that Germany will be the first to come out?!

  • Stephen Archer

    I see tow scenarios – Internal German political pressure erodes the politico/ideology support to the left that Merkel can no longer hold back the will of the German electorate. This is a parodoxical outcome but marginally the most likely in my view – especially as the scale of the Spanish and Italian precipitousness (never mind Portugal) has yet to fully reveal itself.
    That said, the Greek bailout cannot be paid back even with the recent defereal by 5 years of the deadline from 2015 to 2020. I believe that Greece may beg to leave. If so, their new found mechanism will open the way for Ireland and maybe Portugal to depart the Euro.

  • Saa14

    If I were a betting person I would say it would be one of the stronger countries to go first, such as Germany, and politically brave (or bullish!) to boot.

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