Economic recovery exagerrated

The decline in the economy has slowed, but reports of recovery have been exaggerated according to a leading economist.

Barclays Capital global foreign exchange strategist Adarsh Sinha told leading industry figures last week: “Talk of ‘green shoots’ suggests we are seeing a recovery when what we are seeing is more like a slowing contraction, or ‘green roots‘.”

Addressing the Barclays Commercial Travel Forum in London, Sinha said: “The outlook for consumer spending is stable, but we do not foresee a significant recovery before the end of the year.”

However, he warned: “Unemployment is going to continue rising and the outlook is negative on real household income.”

Sinha said consumer perceptions of the economy would improve alongside “more positive” house and asset prices, but it remained unclear how far consumer borrowing would recover. “A lot of money is going to the banks, but they are not lending,” he said. “The situation will improve, but it will take time. We will only see in the months ahead whether households borrow more. I doubt we will see lending go back to the pre-crisis level. We will never see a return to that level.”

He added: “We are seeing one of the biggest experiments in economic history. We do not know whether the [government and central bank] stimulus will work.”

Sinha was more upbeat on exchange rates, forecasting the pound would improve to $1.80 within six to 12 months. “The UK story is not great, but prospects for the US and the rest of the world look worse,” he said. “This is a global crisis.” However, he dismissed a suggestion that sterling could return to a rate of $2 to £1.

He was also upbeat on the price of fuel. “We forecast the oil price will not rise much higher than now, and not above $100.”

Sinha said a change of government would not alter the forecasts. “No matter what the government, it is faced with a budget deficit that cannot be sustained. There needs to be some adjustment.” He
suggested this would involve “a combination of inflation [fuelled by low interest rates] and painful restructuring to reduce the debt”.

Leading industry figures expressed varying degrees of optimism in light of the outlook. TUI Travel UK managing director Dermot Blastland said: “Hopefully, there will be a different economic backdrop by January. The critical factor is the exchange rate.”

Travel Counsellors managing director Steve Byrne said: “We can be positive next year will be better, although the market will probably not come back to the level of 2007 and I do not see a great improvement in margins.”

Monarch Flights and Holidays managing director Liz Savage was more cautious, saying: “I am less positive about next year and far more optimistic about 2011.”

However, Flight Centre UK managing director Chris Galanty said: “Prices are encouraging people to travel. But the airline losses cannot be sustained much longer. Half the airlines will not carry on if prices continue as now.”