At this time of the year commentators like to express their views as to the coming year. Much of this seems to based on extrapolating the recent rise in the FTSE 100 (UKX) and concluding that the recession is coming to an end.
Of course, differing views are required to make a market - and my view is that the rise in the FTSE 100 merely shows how detached the share price formation process is from the real world.
Here are my key reasons:
a) Unemployment
The feedback from students and graduates confirms that finding work (part time or full time) is much more difficult than it has been recently. For example, I was talking recently to the owner of a business which includes a graduate intake as part of its employment strategy. In 2009, incoming graduates were paid at the rate of £14,500 p.a., but in 2010 this rate has fallen by c.66%.
Another factor which is going to impact adversely on those seeking jobs is the effect of government expenditure cutbacks, which both reduces the jobs available (within the public sector and also in private sector companies serving the public sector) and increases the pool of people seeking work.
In my opinion, the above is going to result in people having to price themselves back in to work (i.e. there will be some wage deflation).
b) Inflation or Deflation?
There is much talk about inflation and interest rates having to rise in order to deal with it. In my view, a distinction has to be made between wage inflation and increases in the cost of goods and services. For the reasons given above, I think that the risk of wage inflation is minimal. The antidote to price increases in goods and services is that we (with few exceptions) have it within our control to consume less of the good or service which has risen in price (i.e. if the price of coffee rises excessively, we drink less of it) - this reaction will increase in a world of wage deflation. Perhaps fewer people will feel able to escape the UK for some sunshine at Christmas or consume ready meals in preference to preparing their own food!
c) Discretionary Expenditure
The result of a) and b) is that, on average, individuals' income available for discretionary…
