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Mervyn King & Gold Medals

THE WEEK: Morningstar columnist Rodney Hobson examines Mervyn King's forecasts and discusses his concerns over the Olympics

Rodney Hobson 10 August, 2012 | 11:31AM

King's Last Stand
Bank of England Governor Mervyn King looks increasingly like a man who is coming to the end of his tenure. His pronouncements on the economy were delivered with a world weary air. He has long seen off Gordon Brown and soon he will witness the destruction of the Financial Services Authority (FSA). What else does he have to live for?

The Bank of England is effectively in limbo until the next governor is announced, which may take some time given that none of the potential candidates, with the exception of former Cabinet Secretary Lord O'Donnell, have come through the continuing financial crisis unscathed.

King now admits what most economists have been saying for some time: the UK economy will show no growth for this year as a whole. To achieve even that minor miracle requires the economy to grow about 1% in the second half in order to offset the falls suffered in the first two quarters, something that looks increasingly unlikely.

In its last quarterly report, the Bank was pencilling in 0.7% growth for the year. That is quite a drop in expectations over the past three months, but then King, whose forecasting skills have been suspect to say the least, had not reckoned on a sharp downturn in the second quarter.

Just as the Bank seriously underestimated the length of time it would take for inflation to fall back to around the 2% target level - we are still not there yet - it seems to be too optimistic about the economic recovery.

King says that GDP will take at least until 2014 to surpass pre-crisis levels. You bet it will. It is now five years since the credit crisis erupted and it is quite possible that we in the UK will suffer a lost decade. We may be only half way to getting back to where we were at the start of 2007.

The recovery in the US is stuttering; Germany and France are slipping back; other major European economies are edging further into the mire. While the costs of the Olympic Games are quantifiable, the benefits are less clear cut, with restaurants, shops and theatres in London claiming that takings are down badly.

The Queen's Diamond Jubilee was supposed to boost takings in June, yet we are now told by King that it possibly knocked 0.5% off second quarter GDP. Come October, will we be told that the Olympics reduced GDP as well?

The outlook for the rest of the year is, therefore, for the UK to hold steady. Any growth at all between now and December will be a bonus. Modest growth is a reasonable hope for 2013 and recovery could start in earnest in 2014 as long as we can step up trade with the world beyond Europe.

While none of this prognosis is particularly encouraging, I still feel that investors should buy shares on the dips. I am, however, feeling very cautious after a surge in the FTSE 100 to the top side of 5,800 points this week in defiance of the economic news. I am looking to invest the rest of my ISA allowance for this year but I want to find a compelling corporate story to attract me to pile in at this stage.

Base Metal into Gold
Speaking as someone who has no more than a passing interest in the Olympic Games, and who has fled London to avoid the crowds, I am delighted that the whole event has gone so well. I'm not talking about medals for Team GB but about the fact that the venues were all ready on time and the organisation has been excellent.

One point, though, cannot go unchallenged. The claim that the London Games have come in on budget is ludicrous and is a reminder to all that statistics can be twisted to mean pretty much whatever you want.

When the budget leapt from the original £3 billion to £9 billion, I commented in this column that the figure would eventually reach £12 billion and possibly more. By the time the Games are over and venues such as Greenwich Park are put back how they were, I predict the figure will indeed be £12 billion, four times the budget.

The figure would certainly have gone higher had the financial crisis not persuaded the organisers that the government could not provide a bottomless pit of funding. The then government minister, Tessa Jowell, knocked a few heads together and most notably slapped down the grossly overpriced and overdesigned swimming pool. At least some good came of the recession.

Even so, we have proof that large projects have a tendency to run massively over budget and that project managers sell their pet schemes by hopelessly underestimating the costs confident in the knowledge that once the work starts it is very hard indeed to say stop.

Market Performance (August 6 - 10):
FTSE 100 Index: +1.03%
FTSE 250 Index: +1.50%
FTSE UK All Share Index: +1.10%
FTSE Small-Cap Index: +1.45%
FTSE AIM 100 Index: 2.08%
FTSE Fledgling: 0.76%

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About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, most recently The Dividend Investor.