This is my précis of the economic outlook which was expounded by Stephanie Flanders, the BBC’s Economic Editor, at the New Model Adviser Conference and Awards which took place in the Lancaster London Hotel on 12th and 13th January. The photo was taken during Stephanie Flanders’ address to the Conference.

Stephanie Flanders

Stephanie became the BBC’s economics editor in spring 2008. Prior to that she was the ecomomics editor for the BBC2′s Newsnight programme from 2002. She has won numerous awards, including the 2010 Harold Wincott Award for online journalism.

Stephanie has been a reporter at the New York Times (2001); a speech writer and senior advisor to the US Treasury Secretary (1997-2001), where she was involved in the management of emerging market crises in Asia, Russia and Latin America, and the reform of global economic development policy; a Financial Times leader-writer and columnist (1993-7); and an economist at the Institute for Fiscal Studies and London Business School.

Her father was Michael Flanders, of the 1950s and ’60s musical comedy duo, Flanders and Swann.

Is there anything to feel good about?

Stephanie said that this has been an unusual recession:

• We have not seen the level of corporate failures as in past recessions.

• Employment remained higher than expected even though unemployment is going up now.

• The housing market has not crashed because of low interest rates.

• Corporate cash surplus has remained high although investment of that cash is low.

• Growth in 2010 was strong at 2.1% (the ONS revised figure).

• If you remove oil and gas our growth in the last quarter was a healthy 1% rather than the 0.6% including them.

Where do things stand now?

• Employment is 109,000 lower than in November 2010.

• Household section is in recession as a result of falling household incomes.

• The Office for Budget Responsibility (OBR) thinks the prize for two years of austerity is two more years of austerity.

• All of the monetary tightening totalling £49billion has only reduced the structural deficit by £10billion.

• There has been more permanent damage to our economy than that caused by either the Great Depression or World War 2.

What to watch out for in 2012

• The Olympics – economists are as yet undecided as to whether holding the Olympics is going to be good or bad for the UK economy. For example, there could be a big cost to business in having so many routes in London closed off for so long.

• Inflation – how fast is inflation going to fall?.

• Consumer need – do consumers need to feel good to increase their spending or simply to stop feeling worse? The absolute position may not be as important as its position relative to the immediate past.

What is happening to the Euro?

Stephanie said that the crisis could have been predicted. In fact it was! But the European Governments refused to listen to the economists who wanted to create a common fiscal pot before it happened. Both sceptics and federalists were right – the endpoint of a single currency has to be fiscal union.

The European Central Bank (ECB) is no quick fix as it cannot do something that the individual European member states are not willing to do.

According to the current insurance rates built into the ‘default spreads’ for various countries there is a 100% chance that Greece will default on its debt. There is then expected to be a domino effect. For example, there is a 60% chance that Portugal will default on its debt if Greece does. There is a 60% chance that Ireland will default on its debt if both Greece and Portugal do. There is an 85% chance that Italy will default on its debt if Greece, Portugal and Ireland do. We have to get to France before the default rate is less than 50%, that is, there is a 45% chance that France will default on its debt if Greece, Portugal, Ireland and Italy do.

The big issues for global economies

Stephanie said that there are three big risks to Eurozone economies that would have global implications:

1. A European Lehmans
2. A sovereign ‘explosion’
3. Plain old de-leveraging and recession

Although (1) is the most dangerous to the global economy, the good news is that the risk of this is now reducing. (2) and (3) are definitely possible.

The US is politically crippled. The US labour market has taken a battering and only 63% of men of working age are actually in work. On the plus side the US is demographically strong and has an increasing potential labour force. The message was that we should not bet against the US as it is ‘still the only game in town’. With the difficulties in Europe the US has the potential to experience an economic recovery.

China has had a good crisis. Its command and control style has a while to run but the long term challenges are enormous.

The UK also has the potential to see an economic recovery. We need to ask whether we are being realistic in our pessimism, or is our pessimism simply self-fulfilling. Japan’s ‘lost decade’ now looks better than ours! However, we should not discount our long term strengths. The Chinese, for example, are envious of our democracy. Eventually the economic forecasts for the UK will start to turn optimistic.

made the shortlist

At the New Model Adviser Conference and Awards we were delighted to find that we had been shortlisted again for the New Model Adviser of the Year South East. Although we did not win the award we were one of only five independent financial adviser companies on the shortlist for the South East region, no mean achievement given the level of competition.

Please note that this information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

If you would like to review your investment portfolio or your financial planning generally please ask your usual Arch adviser, telephone 01483 204600 or email enquiries@arch-fp.co.uk.