The Recession is Over, but We Haven't Finished Receding

It would seem that I was almost correct in my prediction in February 2009 about when the recession would end, but I wasn't quite there.

I thought that the UK economy would emerge from recession at the end of the first or second quarters of 2010, but it seems that the recesssion has officially come to an end as of the last quarter of 2009, with a 0.1% growth in that period.

But I wonder, does this mean fat bank balances, healthy order books, green shoots and bulls everywhere? Or does the fact that the government printed £200 billion pounds of new money and borrowed £178 billion mean that we have painted over the cracks with non drying paint? Will we be struggling to remove the stains from this period for years to come?

I think so.

I think that it will take a long time for the economy to become properly stable again, and for the MPC to raise interest rates again. It'll be 0.5% here, 0.5% there, starting towards the end of 2010. I do hope that it will take a few years to reach the likes of the pre-recession interest rate levels because I will continue to save money on my mortgage that way, but with the value of the pound being damaged by the low rates, the decision on when to raise rates and by how much will be a tough one.

Confidence and value in the pound needs to be restored, but it needs to be done without hammering Joe Public again who owns a small business and has a mortgage on his home and a lease agreement on his Mondeo.

We've seen some strong results posted by the BigCo's from around the world, such as Goldman Sachs, J.P.Morgan and Barclays, and a return to 'record bonuses' and the much publicised 'banker bashing' by politicians who take the short term view and are keen to curry favour with the non-discerning public. While I completely agree that a return to excessive risk taking and rewards for short term gain would be completely unacceptable, government driven initiatives such as the 50% bonus tax, plans to break up the biggest banks and to introduce new regulation to the OTC Derivatives market will only serve to destabilise Wall Street again and bring about uncertainty in the future.

I predict that in 2010, big banks will struggle to make as much profit as they did in 2009. New regulations and economic recovery mean that new ways of making money will have to be found rather than capitalising on certain types of investment which have become lucrative due to the desire for stable investments (gold, government and municipal bonds etc). And rather than making bucketloads of cash on complicated structured investments with investors facing each other directly, the focus will shift to making a little money on a lot of deals over exchange with clearing houses in the middle.

Things may be better in terms of unemployment, house prices and general consumer confidence, but I think people should still be cautious since we're not out of the woods yet - the bear is still in charge.