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Wind in the UK’s Sails?
01 Oct 2010: The cheaper pound is the UK’s saving grace. Investment is recovering, and before long so will manufacturing. That’s the game plan anyway. As exports aren’t doing too badly, there is cause to be optimistic, though the biggest question remains what effect budget cuts will have on overall employment and whether the private sector can step into the gap. So far Sterling’s weakness, and the UK’s underrated capabilities as a trading nation, has helped cushion the economy. Don’t bet against a recovery in the UK manufacturing and export sectors, therefore – regardless how currency tensions between the North American, Asian, and European currency blocks are settled. However, as Mayor of London Boris Johnson has warned there are stormy political waters for the financial sector and the economy to navigate before the UK can steady the ship of state on a new and prosperous course.
One of the squall’s on the horizon is the question of when interest rates will return to ‘normal’ – given the uncertain effect of the Bank of England’s Quantitative Easing program will have on inflation. For an interesting perspective on this, read Liam Hallingan’s piece ‘Policy makers must do more than print money and hope for the best‘.
The reason why the UK house market is softening again could be that buyers are now pricing in the potential for interest rate rises while working out what they can afford to pay. UK broad money has grown rapidly over the last three months, especially the deposits of non-bank financial companies, hinting at economic growth and possible interest rises in the not so distant future. It would appear that as long as accessibility to mortgage financing remains challenging, as the Royal Institute of Chartered Surveyors’ latest survey concluded on 30 Sep, then the cost of housing might be expected to fall to more affordable levels – as it is inexorably doing in the US. After all, lending can’t be expected to return to credit bubble era levels.
Or can it? The market’s appetite for corporate debt at the moment is a positive sign that investors still think their assets are worth something. And when you look at the economic engine for growth represented by Silicon Valley and the technology industry, there shares really are valuable.
Back in rainy England, RICs chief economist, Simon Rubinsohn, remains optimistic about the UK housing market. House prices in London and the South East should show the greatest resilience, reflecting the importance of the financial services industry and overseas interest in driving demand. “And low interest rates will remain a major prop for demand even if accessibility to mortgage finance remains challenging,” he says.
And lets hope Bank of America Merrill Lynch are right in thinking demand in the economy will be sufficient to prevent renewed sharp rises in unemployment – as it was in the recession of 1993 – when 750,000 public sector jobs were cut. The private sector will drive the labor market outlook, it believes, “dominating the effect of public sector job cuts of perhaps around 100k per annum over the next few years.”
Yet the Mayor of London, Boris Johnson, remains concerned about the need for banking sector pay restraint this Christmas, while remaining hopeful that the government can make the necessary deficit reductions without starting a new recession.
Whatever the outcome of that debate, at least there’s one consolation. The UK’s banking sector is in better shape than it was – which may turn out to be a very good thing given the weather forecast for the European banking system.