Weekend reading: Doomsters wrong-footed again

My weekly waffle, plus some decent links from around the web.

I am sure everyone is getting fed up with me blowing my own trumpet about predicting ongoing growth in the UK, against the backdrop of general despair at the start of the year.

But I’ve got to admit that this week’s release of a 0.8% GDP growth figure for the past quarter for the UK made me chuckle.

As the Motley Fool recounted:

Consensus estimates were of a modest 0.4% growth in the economy in the third quarter (Q3) of the year. Instead, GDP growth came in on Tuesday morning at a surprising 0.8%, a level predicted by only a handful of economic forecasters.

What’s more, growth was broadly spread, with construction, services and manufacturing all posting strong gains; and only the agriculture, forestry and fishing sector failing to increase output.

The contrast with the gloom expressed in the media couldn’t be more stark.

Not all the media, dear Fools, if we can count humble Monevator amongst such ranks.

The real question is what happens next? As ever, it’s difficult to say – certainly more difficult than most of the knee-jerk gloomy predictions of the past 18 months made out – but I’ll have a bash at risking my own track record.

In my view, it was pretty clear that the UK would grow this year. The signs were that the slowdown had plateaued, and the banks were at the least on life-support. Add that to spectacularly low interest rates and a weak pound, and it would have taken – literally – a bomb for UK GDP to slip below zero in my view (or possibly the break up of the EU, though that never seemed immediately likely).

The consensus now is this 0.8% GDP growth represents a last fling before the storm of pain to come from the spending cuts next year.

I doubt it:

• State spending is actually increasing in nominal terms – the idea that money will drain from the economy is nonsense. Services may suffer, but business won’t fall off a cliff.

• I don’t see any reason for interest rates to rise presently, and low interest rates are pumping millions into middle-class mortgage owners’ pockets every month. Provided they’ve kept their jobs, many in the key 35-55 demographic have never had it so good.

• At worst, I think unemployment will be flat. This displacement of jobs from the public sector to the private sector is very credible.

I don’t doubt the private sector is better at allocating capital and finding useful productive work for workers to do than the public sector. The only dispute for me is the extent to which we need to redistribute the gains from private enterprise to limit inequality (I think we should, up to a point) and how much the State should step in to do work private companies can’t or won’t (certain aspects of health care, for example, and the upkeep of our nuclear missiles).

So I see most of the cuts as highly desirable. Indeed, if I look at my 10 things I didn’t want to pay taxes for any more article from May, I see the Coalition is making inroads into most of them. I’d take some credit, except that most of these cuts were so blindingly obviously required, it’d be more shocking if they weren’t enacted.

Anyway, my prediction is for another year of growth from here, perhaps below trend at say 2% GDP if there’s another Euro-wobble, but with the potential to surprise to the upside. The key domestic risk I see is a second slump in the property market, which does seem to be listing again. That would be great for me, but it wouldn’t be great for UK GDP.

If you’re a UK equity investor, the balance of risk and reward seems even clearer. Insignificant domestic interest rates and potential QE, awful yields on bonds and cash, and 70% or more of UK company earnings coming from overseas is all hugely supportive for further stock market growth.

No guarantees, of course – stock markets can do anything in a year – but I think that’s the likeliest outcome, and a sound reason to take any doom and gloom you read with ongoing pinches of salt.

From the money blogs

• How I learned to love the end of the world – ERE
• Monte Carlo simulation or nuclear bust – The Psy-Fi blog
• Adding ROE to the mix – UK Value Investor
• Are UK banks worth anything at all? – Stumbling and mumbling
• QE2 drowning TIPS yields below water – Investing Caffeine
• Should you borrow to invest more? – The Dividend Guy
• Larkin’s Lament – New Escapologist

Money Maven Network roundup

• Oblivious Investor thinks investing requires guessing.
• Len Penzo asks whether you should pay off your mortgage.
• Wealth Pilgrim muses what is a good credit score range?.
• Canadian Finance Blog suggests ways to save money on vacation.
• MH4C explains how to get out of credit card debt.
• The Military Wallet rounds up some Veteran’s Day Discounts.
• Deliver Away Debt wants you to focus on what’s important.

From the big media sites

• The future of biofuels – The Economist
• King plays God (Fixing UK banking) – The Economist
• Rethinking early retirement in Europe – The New York Times
• Sighs of relief after GDP figure – Flanders/BBC
• Warren Buffett picks a successor – Motley Fool
• Junior ISAs to replace CTFs – Telegraph
• Britain’s property market in a double-dip – Telegraph
• Three sensible changes to feather NEST (pensions) – FT
• Also, consider protecting your pension in a pre-nup – FT
• Investors buying platinum and palladium ETFs – FT
• Demand surges for luxury London homes – FT
• Downside of the rise in sterling – FT
• Fix your finances in one morning – Independent
• In it for the honey (beekeeping!) – Independent
• Will pensioners really get £140 a week? – The Guardian

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