Hitting the big numbers

Just the other day the FTSE 100 index hit 5,000 for the first time in nearly a year.  As mentioned in our driver, stock market levels are mainly driven by confidence. So does this recent bounce mean we are seeing confidence in the UK stockmarket growing? Breaking the 5000 points barrier led to a fair number of news articles proclaiming the start of the end of the recession. An equal amount of media space has been dedicated to the Kraft takeover bid for Cadburys. Some see take overs (mergers and acquisitions) as a positive sign, with their demand for big bucks backing. However, the experts (such as Bank of England Governor Mervyn King) are most definitely hedging their bets about whether this signals a change in fortunes for the economy:

The British economy has probably started growing again but recovery will be slow and risks to inflation are still to the downside


So the market wizards are still nervy. It seems that confidence may be coming back to the markets, but that this alone isn’t seen as enough to withstand the body blows yet to be delivered by unemployment levels and huge public finance debts.

The dreaded ‘w’?

As if to temper what can hardly be called heady optimism, there is also the threat of the double dip recession. The only people to have stuck their neck out to say that the recession is over are those at the National Institute of Economic and Social Research. But even they then warn that it might be followed by stagnation next year. This view is echoed by the European Commission, and the IMF – big players in the economic game. Some economists point towards the example of Lloyds Banks share prices which rallied in March but have been lower in recent weeks, as the FTSE 100 index fortunes do seem to mirror the fates of key banks such as Lloyds or RBS.

So confidence may be building in the stockmarket but the solid finance needed to turn that confidence to reality is being slow to come forward. With a lack of real economic stability behind it, many argue that the stock market has risen to an unrealistic value which means the bubble will pop again and there will be stock market drops. Lets not forget that it was over-inflated share prices that got us here in the first place, so we have to be cautious about getting over-excited.

A case in point can be found if we look into the rise in house prices . Those who have been holding their breath and holding onto their houses waiting for prices to rise may be feeling relieved (as the graph shows, they're starting to look up). chart showing house prices

This is possibly being driven by banks getting back into gear for financing mortgages. However, they’re still wary of corporate lending. And corporate lending is really what greases the economic wheels.

Looking at the laggards

Interestingly, as far back as March and April, economists were predicting that the economy would start to recover in September. One week into that month and their words look eerily accurate. So what else did they say? A key point was the ‘lag indicator’ nature of unemployment (see our driver on this topic), which would mean that levels would not recover until next year some time; with the implications this brings of new jobs and a resurgent market not truly taking hold until then. When unemployment levels are high, it does have a knock on effect on consumer spending and confidence. If people are watching the pennies, they are less likely to be lured into the high street, no matter how many sales are put on. Lack of pounds turning over in the nation’s shops has a dampening effect on the economy. So although stock market confidence may grow, its manifestation on the economy is going to be quite delayed.

A similar lag element is recession in the public sector. This traditionally follows on from private sector economic issues in a similar way to unemployment levels. Faced with their own credit crunch and economic crisis, the public sector is likely to have to slash jobs to stay on the ball. As one of the largest employers in the UK this is going to be a follow-up blow for the current low employment numbers.

And lets not forget that this time next year, we’ll see another flood of fresh graduates which may well overwhelm any falling unemployment numbers. So whilst the stockmarket is likely to be looking happier, this is unlikely to be echoed by the jobs market.

Back to normal

Mervyn King talks about levels of output getting back to where they were – the ‘business as usual’ approach. When they’re threatened by uncertainty, people do yearn for a return to ‘the good old days’. However, this recession has seen the emergence of a school of thought that it could be the opportunity to address societal ills which were seen as root causes of the credit crunch and thus the recession. One example of this train of thinking is NEF’s green new deal. Is there more potential for charities to play a key role in society with the traditional approach, or with these newer envisionings? It could be argued that these alternative ways of shaping society place greater emphasis on traditional charity values -  community over individualism, ‘good’ society over material wealth. Do you think that this is happening? See my post on The Big Lunch for more thoughts on this topic.

And finally, some interesting things I came across...

  • These people provide good insights, so worth a browse.
  • As do these people (and don't be put off by their busy looking pages!)
  • On the NIESR website they have an interesting graph plotting this recession against various other ones over the last century, to give this situation a bit of context.
Last updated at 12:00 Mon 07/Feb/11.
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Karl's picture


Third Sector Foresight

Great article, Kathryn.

So, you might polarise opionions into two camps: the optimists who believe the recent indicators such as the uptick in the housing market or in industrial production figures, and the pessimists who expect us to hit some quite different big numbers: unemployment of 3 million, which may well be timed with unerring accuracy with a general election, and a government spending deficit of £200 billion for the current financial year. (Incidentally, will anyone actually care if technically we are out of recession when unemployment hits the big 3m?)

In other words, is it the beginning of the end or the end of the beginning? For some, the answer to this will be shaped by the arguments currently doing the rounds around public expenditure, and whether public spending should be 'counter-cyclical' (a la Keynes - increase public spending to counter the drop-off in demand from the rest of the economy) or pro-cyclical (cull public spending to deal with the drop off in tax receipts. Larry Elliott provides an excellent discussion of these approaches in recent history.

Much of the current debate in the voluntary sector seems to me to be about the extent to which we are pro- or counter-cyclical and the implications of this. One might hope that as an economic force the sector is counter-cyclical: ie levels of activity and expenditure increase at the bottom of the economic cycle to address the increasing need of those squeezed out of the formal economy. But what if the more difficult reality is true, that we are pro-cyclical, our collective endeavour waning as our resource inputs (such as charitable giving?) decline?

Putting aside the slightly awkward point that at less than 1% of UK GDP the sector's economic contribution is neither here nor there, the perhaps unsurprising evidence is that levels of activity in the voluntary sector are not necessarily related to what is happening in the economy. There are examples of Keynesian jolts: grantmaking foundations maintaining levels of disbursement despite their own investment blues, or frontline organisations mobilising greater numbers of volunteers. New charities continue to be established in years of downturn at similar levels to normal years. On the other hand, evidence seems to suggest that the sector's ability to mobilise donations in recessions reduces, with charitable giving falling. Similarly, in the last recession in 2001/02 the sector's income fell.

So what? Well, for me this highlights that for voluntary organisations the age of austerity is even more an age of uncertainty. Planning cycles that should be thinking of the medium term as 3 years ahead are struggling to cope with the short term of 12 months ahead. The pessimists will undoubtedly highlight the certainty of the public sector recession that Kathryn noted, but as we recently noted, large swathes of the sector receive no public funding and therefore have nothing to lose. So I personally dont think that a voluntary sector recession automatically lags the real economy recession. That's not a prediction that everything will be fine: but in a sector with such divergent component parts, trends analysis is about to get much messier.

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