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LDN Economic Update – week commencing JAN 25 2010

So what will happen to the banks – and will the US “go it alone”?

1. Obama’s Broadside

The electorate in Massachusetts had a major impact on the week – they turned on the President who promptly turned on the banks – “If these folks want a fight, it’s a fight I’m ready to have. Under Obama’s reforms commercial banks will be banned from running their own trading desks and owning, investing in or sponsoring hedge funds and private equity groups. In other words banks will have to split themselves between owning an insured depository and owning proprietary trading operations.

It’s interesting to note that the Glass-Seagall Act created such a split following the 1929 crash; it was only repealed in 1999! But the core issue now is whether other Governments follow suit (Lord Myners has ruled out such an approach in the UK although George Osborne’s position is more supportive of such a split).

2. The Scorched Dragon

China started the week with good news – GDP rose by 10.7% in the last quarter of 2009 putting it on course to become the second largest economy later this year. But economists are nervous about inflation and Chinese banks are now expected to cut lending by 20% in 2010. Internationally the fear is that curbing Chinese liquidity will have an impact on global economic recovery.

3. UK still Mixed

The road to UK recovery remains uneven. Whilst the SMMT reported that vehicle production rose by 58.5% in DEC (sharpest jump for 34 years), the ONS reported that DEC retail sales were only 0.3% up (1.1% was expected) and JAN will be dreadful as a result of the snow. A consumer-led recovery seems increasingly unlikely as other ONS data showed that wage growth hit a record low in the 3 months to NOV with average pay in the private sector failing to rise at all.

My challenge is still open. Where do you expect the UK GDP to end up on JAN 1 2011? I’m still predicting 1.6%, and I’m getting lots of other suggestions too – so let’s have yours! E-mail me on abellinger@iitt.org.uk (entries close at the end of the month)

Alan Bellinger
25 Jan 2010

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