Debating double dip

The double dip debate is dominating investor thoughts over the summer, as earlier optimism about a sharp-recovery makes way for wider worries such as sovereign defaults.

Trading has rebounded strongly, and some operators are already talking about a pronounced bounce, but with government cuts and still constrained lending, it is probable that a hard road lies ahead.

The immediate bounce has been impressive. Figures out this week from the National Institute for Economic and Social Research, a respected London think tank, put world output growth at an annualised 4.8% in the first quarter.

This was driven by Asia, with Brazil and Canada also accelerating. The laggard was Europe. World trade is expected to rise by more than 14% this year.

The International Monetary Fund is similarly optimistic, predicting a 4.5% increase in world growth in 2010 and 4.25% in 2011, according to its World Economic Outlook update that came out earlier in July.

But the IMF said downside risks to its forecasts were greater thanks to "renewed financial turbulence", driven mainly by concerns over sovereign risks.

The IMF view was that governments should resist tightening fiscal positions until 2011. Existing plans for next year take out 1.125% of GDP, with the Euro area the hardest hit.

In the UK, the NIESR estimates that Budget plans will cut GDP growth by 0.1 percentage points this year and by 0.4 percentage points next year. It forecasts that UK economic recovery will be weak, 1.3% this year, 1.7% in 2011 and 2.2% in 2012.

The cuts in UK Government spending, which are 25% outside of protected departments, will lead to two million fewer room nights of demand at UK hotels, according to Otus & Co. This will outweigh the recovery-driven growth in domestic business demand, warns Otus.

At the same time domestic leisure demand will be hit by the increase in VAT in January 2011 and the expected sharp rise in unemployment as government jobs are cut.

Paul Slattery, co-founder and director of Otus, said: "We need to see positive steps from Government to promote the industries that actually have the capacity to pull the UK and Europe out of recession, not just policy based on ill-conceived notions about the importance of agriculture and manufacturing which do not have the capacity to create new jobs and generate little hotel demand."

Unfortunately, there are few signs that the Government in the UK is paying much attention to the needs of the travel and tourism industry. This week the Department for Culture, Media and Sport (there is a clue to its focus in the title) announced it was reviewing what the tourist boards, Visit Britain and Visit England, do.

The widely tipped outcome is for the two boards to be merged and cost savings thus extracted. Rather than this catching the media's attention it was the much less economically important film industry changes that were the focus for most reports.

The UK is not alone in its apparently short-sighted approach. Even in Spain, where tourism is widely recognised as a vital industry, the government there is intent on making cuts.

This has seen the axing of a separate tourism secretariat within the Spanish Government. As the World Tourism Organisation pointed out, this is despite tourism accounting for 7.5% of the jobs in Spain, 10% of GDP and 20% of exports.

And this is no dry academic debate for property investors either. After a roller coaster ride, values are reaching a plateau and income looks set to be the key driver over the next few years.

In mid-July, the Investment Property Databank showed figures for commercial property in the UK that saw capital appreciation slow to its lowest quarterly growth since the third quarter of last year when the value rebound started.

Since the market peak in June 2007, value have fallen 44.2% over 25 months to reach their low point in July 2009. Since then, values have rebounded by 15.2% over the 11 months to June this year. This growth in value was driven by yield compression which came in by 175 basis points. Rental values fell however by 3.1% in this same period.

So there has been a value crash driven at first by yields moving out and then exacerbated by rents dropping. Yields have come in a little but they now seem to have hit a plateau. It is now all down to rents. And this is where the economy comes in.

A double dip does not seem likely. But a long drawn out recovery does - this has been the pattern after recessions caused by financial crises according to most analysts (including the IMF).

The recent bounce in hotel trading at the start of this year may yet prove short-lived.