The Office for National Statistics (ONS) confirmed that the UK economy is on the road to recovery when it released figures on 26th September confirming that it grew by 0.7% in the second quarter of 2013.
In addition, the ONS was able to confirm that the construction and industrial sectors had expanded at their fastest rate in 4 years.
On the downside, business investment dropped £786m in the three months to June to £28.7bn. This is the second worst reading since the height of the recession in September 2009.
Now, I don’t want to throw a load of cold water on all the generally good news around, but isn’t it all on a bit of a knife edge? Our economy, like it or like it not, is 60% driven by the consumer. As I have discussed in previous blogs, the British consumer has generally been feeling a lot better, in fact GfK has just published a survey on consumer confidence showing it to be at a six year high.
However, in my opinion this new-found consumer confidence is mainly due to there being positive media talk on house prices. On 27th September, for instance, the Nationwide Building Society published their latest survey saying that house prices were 5% higher than last year, the steepest annual increase since July 2010. Annual house price inflation in August was 3.5%.
In my opinion, the economy is still in a very fragile state, and it would not take a lot to make a great big dent in this “feel good” factor. If, say, we had some slightly less cheery news on the property market, could there be a wobble? How would this affect how we all feel, and would we still be going out to buy more stuff? We might just revert to austerity mode for a while, after all we have all become well used to this over the past five years.
George Osborne is coming under increasing pressure to look closely at the Help to Buy scheme in an effort to head off any potential bubble in the market. The two main protagonists, Ed Balls and Vince Cable are demanding that action be taken and on 27th September George Osborne announced that he would pass some responsibilities for overseeing the scheme to the Bank of England’s Financial Policy Committee (FPC). The FPC will be able intervene in Help to Buy, if it sees any evidence of overheating, either by lowering the maximum purchase price of £600,000 or increasing the fees.
What effects would that then have on the economy? It could all become a self-fulfilling prophecy very quickly, with a fall in consumer confidence resulting in a lower level of GDP than had been predicted!
I believe this bit of house price inflation we are seeing at the moment is pretty much single-handedly helping restore business and consumer confidence. Whilst, theoretically, this is maybe not the most sophisticated use of the arsenal of economic tools the policy makers have at their disposal, it does seem to be working. The downside, of course, is that we may well have to suffer another downturn in five years. If so, perhaps we can create a way that makes it less painful than the last one?
In today’s global economy we are strangely more dependent than ever on our own domestic consumption during this period of stagnation within our main export customers i.e. Europe and America. Let’s hope the consumer in us all stays upbeat and keeps buying.
It is all still very much on a knife edge…
If you have any comments on this article or would like to discuss any aspect of it please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
Image by: B Tal