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Monday, 22 March 2010

What Growth?

As the countdown to the UK Budget for 2010 comes to an end, the City is pressing for the Chancellor to reduce his estimate for economic growth. This pushes down the projection for tax revenue, and makes cuts in spending more urgent and imperative.
The City is right to be cautious in its predictions: because the City is the most likely component of the economy to 'underperform' in revenue growth as the global economy settles down to a post-crisis mode of operation.
So long as the UK 'retail' banks are badgered by the FSA to strengthen their balance sheets, there is little flexibility to support industrial growth. Company dividends are increasing: because firms are hesitant to put their own cash into material investments when projections of consumer demand are weak. Companies with 'cash mountains' that pay low dividends [and therefore have low share prices] are highly susceptible to takeover; so a defensive strategy requires distribution to the existing shareholders. That keeps them sweet, and reduces the takeover risk.
This all indicates lower rather than higher activity in the 'real economy'; and any apparent growth in corporate turnovers is likely to reflect the inflationary tendency that is lurking in the economy.
There's little good news in this scenario!

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