Good news! We're in a double dip

News that Britain has lapsed back into recession has flustered the City. But don't panic, says Bengt Saelensminde - for this is no ordinary recession.

Data out yesterday showed that the UK is back in recession. We double-dipped in autumn last year and the economy has been contracting ever since. That's what the numbers say.

But it seems some City commentators are in denial about it. Goldman Sachs' UK guy called the numbers "unbelievable". The British Chambers of Commerce says they're "pessimistic". And one of Ernst & Young Item Club's advisers also reacted with "disbelief".

Basically, these guys are saying the Office for National Statistics (ONS) has clearly got its sums wrong.

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Boy, oh boy... there are none so blind as those who will not see!

These guys tell us that business surveys point to recovery. They say business leaders are feeling more confident and they're spending and investing.

I'm prepared to accept that. But the GDP figures don't lie. The fact is that this recession has nothing to dowith business. As many Labour critics say, this is a recession made in Downing Street. And they're probably right as I'll show you in a minute.

I think we need to take this data very seriously. But so long as you're smart with the way you invest, there's no reason to worry about it. There's certainly no reason for you to get panicked out of your core investments right now.

And in fact, for many businesses, this recession is actually good news. Today I'll explain why.

Why the double dip isn't bad news for everyone

Here at The Right Side I've been predicting a double dip for the past two years. The mainstream media (and most economic pundits) said it couldn't happen. But to me it was kind of obvious.

I mean, getting on for half of GDP revolves around government. Much of that is a legacy from the Blair/Brown years, of course. And the coalition has promised to bring this figure down. But that's easier said than done and it's going to take time.

But the thing that really gets me is that people are so surprised that industries like construction are contracting. This latest ONS data shows that construction activity was down 3% in the first quarter of this year. What's happening is that many government projects are being pared back. Of course that's bad news for the businesses that depend on government work. Over the last year there have been a lot that have been hit hard names like AMEC, Carillion, Balfour Beatty off the top of my head.

But don't be alarmed. As far as much of the private sector goes, it's no bad thing. In fact, it's good news for some companies. It creates a competitive market for good construction staff; suppliers are more likely to discount their wares; and there's more capacity when it comes to hiring plant and machinery.

In economic parlance, the government is and has been crowding out' the private sector. And that's got to change.

Right now there's a semblance of rebalancing going on. Yes it's tough on many who are reliant on government work but what's the alternative? The government cannot continue to rack up debt as it has over the last ten or fifteen years. It's not good for the taxpayer, and it's certainly not good for the private sector.

What to do with your money today

The figures suggest that the economy contracted by0.2% over the first quarter slightly better than the 0.3% contraction at the end of last year.

Clearly these are pretty small figures. And as I said, so long as we're contracting in the right places, it's no reason to be panicked out of decent investments.

As the economy slides sideways, I think you can pretty much write-off the idea of a hike in interest rates. That, in itself is good for stocks. Here at The Right Side, we're keen advocates of yield stocks. I have in the past shown you how you can get exposure to the FTSE 350's highest yield stocks with just one investment. And as it stands, you can earn just under 5% on this ETF. Putting a portion of your money in high yield stocks could be a smart move.

Yes, there's a chance that we could face another financial crisis and that could be bad news for the stock market. And it's exactly why I've been showing you how to place some insurance to cover against this eventuality. Not least of which is holding back 25% of your portfolio in cash.

But if you get panicked into dumping the lot, then you may find yourself missing out not only some decent income, but potentially a bit of capital appreciation too.

Unfortunately, we're in a long and painful period of readjustment. Don't let the media and the economists (who always seem to get it wrong) try to suggest otherwise. And not making this adjustment and rebalancing our economy can only lead to a financial crisis la Grecque.

But at the same time, this isn't bad news for many businesses out there. It just means you're going to have to be a bit picky that's all. In fact, I have a couple of stocks on my watch list that I think could do very well. I'll tell you about them in coming issues.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

 

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

 

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.