Rough times ahead says economist

THE economy is in uncharted territory and businesses and individuals face three years of pain, according to economist David Rough.

Mr Rough, chairman of investment firm Brown Shipley told a meeting in Manchester that there was no “magic wand” to cure the issues businesses are facing.

“The key issues are liquidity and confidence, but we have never been here before in global economic terms – the closest thing was the 1930s Depression, and it’s unlikely any of us will have experienced that.

“Even then, the Depression was a case of purely excessive speculation, not the toxic mess the financial system has got itself in.”

Mr Rough, a former chief investment officer with insurance giant Legal and General said the effective nationalisation of the banks meant that over time the issue of liquidity should ease, but there was still great reluctance for banks to lend to each other because of a crisis in trust.

He said part of the reason for this year’s financial crisis were that “banks were not being run by bankers” – a pointed reference to former Asda executive Andy Hornby who was at the helm of HBOS, and his chairman Victor Blank, who spent much of his career in the media.

Mr Rough predicted that more economic stimulus programmes would be needed to help consumers but he warned that because the government has had to borrow so much money, “it would be dipping its hands in your pockets like never before” at the first sign of an upturn.

“National insurance will go up, VAT will go up, income tax will go up. I believe it’s going to be old, radical, extremist Labour, because they are going to have to tax the rich”

The pound will remain weak and he said it was “not impossible” that Gordon Brown would take the country into the euro in a bid to “stabilise a weak, isolated currency”.

Peter Botham, chief investment officer at the firm, said the picture for 2009 was very gloomy with “an accelerating recession” in all sectors, affecting everyone.

“One could argue the recession in the 1980s was a manufacturing recession, but this time there will be no hiding place and it’s going to hit the financial services sector hard. I think there’s going to be unrelenting bad news for the next three months at least.

“The banks will be reluctant lenders – they are charging credit card rates to lend to businesses, plus they will have to repay the Government and is more bad debts to come.

“The housing market will be starved of mortgages and there’ll be no consumer boom to get us out of recession.”

On a more positive note he said there were some positives – namely lower manufacturing costs as a result of the falls in commodity and oil prices; higher unemployment causing lower wage pressure; weak Sterling assiting exporters; and low inflation and interest rates.

“I think we’ll start to see improvement in 2010, with a gradual improvement in corporate earnings driving a 20% increase in the UK market.

 “It’s going to be very grim but we can see a way through. It will get better,” he concluded.