Great news that the IMF has upgraded UK growth for 2014 to 3.2% and that the UK economy is back at the same size as it was before the crash.
Well done everyone; the Chancellor for sticking to the austerity part of his turnaround strategy, introducing Funding for Lending and Help to Buy; and most importantly well done to us consumers as we have continued to buy lots of stuff when times have been tough.
Whilst not wishing to put too much of a damper on this, I just want to put forward a slightly alternative view that suggests the UK turnaround strategy may have peaked, and that we might just be about to slip back a little. In my opinion it is still much more precarious than the story we are being told by the media.
Whilst employment continues to grow, real earnings growth is still struggling with inflation remaining stubbornly high and wages moving up at not much more than snails pace. It is a matter of fact that the recovery remains unbalanced with construction and manufacturing remaining subdued. Whilst services are nearly 3% higher than at the previous peak, manufacturing is still more than 7% down.
Here are some of the key issues that I believe will determine whether we continue moving upwards, or possibly derail us from this growth trajectory.
1.Interest rates
We have had record low interest rates now for a long time in an effort to support the over indebted and to avoid armageddon. In an effort to show he is up to speed with controlling inflationary pressures, Mark Carney keeps indicating this is going to change sometime soon.
If and when rates do go up it will have a significant effect on both confidence and of course the affordability of stuff we the consumer have been buying. It will also have an effect on house prices…
2.House prices
After the stellar performance of the housing market over recent times, it seems there was a blip in June 2014, with the Halifax Building Society reporting prices experienced a bigger monthly fall than analysts had expected, knocking £1,100 off the average property value, according to the Halifax.
This is the fourth monthly price fall since last December according to the Halifax, but notwithstanding this, the value of the average house rose by £16,000 in the 12 months to June, their biggest annual leap in seven years.
So, whilst the overall picture is on the increase, the market is still subject to monthly fluctuations and in my opinion it wouldn’t take much, say interest rates at just 1.5%, to put the whole thing into a bit of a reverse. It is delicate…
3.Retail sales growth slowing
The growth in retail sales, that has been helping to propel the economy forward, slowed in June as reported by the KPMG/British Retail Consortium’s monthly survey which said that total sales in June were up just 0.6 per cent on the previous year. After they had stripped out the distortions caused by the timing of Easter, this was the lowest growth rate in three years.
4.Ukraine
Notwithstanding the potential for a super power conflict, which would of course be disastrous, the UK government are threatening sanctions against UK based Russian oligarchs. I have already seen a report that some of these super wealthy individuals are moving their money elsewhere. The country was saved from a massive hit in property prices following the financial crisis as a result of these and other of the world’s super rich parking their money in the London property market. This unintended consequence meant that we saw drops of 20% rather the widely anticipated 40% and this was the springboard for the recent dramatic revival in property prices and by an amazing coincidence the economy returning to growth.
If we start taking these buyers out of the equation, in my opinion it could have a significant effect on the London, and therefore South East, property market. Because of this I think the Government will think twice before taking any action, but if they did, it would not be good for the economy…
5.The 2015 General Election
The price we pay for living in the ultimate democracy, is that our politicians have such a relatively short time at the helm, and as a consequence come May 15 we may see a new Chancellor who wants to make his mark and point us in a whole new direction. The way the polls are looking at the moment it may even be someone with previous experience of the job.
Let’s hope we stay on track, but you never know…..
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.
John Thompson is Managing Director and founder of Trans Capital Associates
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