Reeling out of recession

The breeze of optimism I reported in my last, post-Hogmanay, update has dwindled to the faintest puff of cheerfulness.

In February it was confirmed that the UK finally wheezed and wobbled out of the longest recession since the Great Depression. A 0.10% expansion in the economy since October was well shy of the expected 0.40% expansion and raises doubts over the UK's longer term recovery prospects.

The longer term prospects for the UK base rate have also been thrown into the air. With the record budget deficit, the fragile state of the housing market and the continuing reluctance by banks to lend, all set against the rising spectre of an inflationary spike, Mervyn King & Co at the MPC are left in an unenviable quandary. Having pumped £200Bn into the UK financial system the MPC could be forgiven for wondering what's left in their armoury to keep the UK on the straight and narrow - a careful balancing act between stimulating recovery sufficiently and keeping inflation in check, with the use of further quantitative easing still being debated.

Part of the argument around quantitative easing revolves around the decline of sterling - but here it is worth noting the recent bullish viewpoint taken by a certain Jim O'Neill, Goldman's Chief Economist. Jim reasoned that sterling's depreciation over the last couple of years was helping exports and the wider economy to such an extent that he believed the UK is the best placed of all the major economies for economic recovery. In light of the meagre size of the UK's rate of expansion many of Jim's doubters may be patting themselves on their backs in hindsight of his optimism.

The impact of all of this on the UK base rate remains to be seen and we look forward to some revealing minutes from the MPC over the next few weeks. Investec's own economist, Phil Shaw, takes the view that if the Conservatives win in May's general election monetary policy will start to tighten around Q4 2010. So, could this be the silver lining hidden in between the wintery clouds? Potentially better news for cash that you or your clients hold personally or through SIPPS?