Bruised Bulldog, Soggy Sterling:
A Round Up of the Recent British Economic Situation
Nuts & Seeds
A small slice of the big picture:
- In the past year, up to the last quarter, GDP growth was -5.5% - the UK's highest annual economic contraction since records began in 1955.
- In the past year the construction sector experienced a 14.7% decline in output.
- Production output fell by 11.8% in the past year.
- The service sector has seen a 3.8% output reduction in this period.
- The Bank of England base rate is still at its historically low level of 0.5% for a seventh month.
- An extension of £50 billion was implemented in August for the Quantitive Easing Programme, which has 'mushroomed since March' and now stands at £175 billion.
More recent reports over the last quarter are mixed:
- Consumer confidence is up.
- Business sector contractions are easing, with a little expansion evident.
- Retail sales have improved a little.
- The Nationwide NSA monthly data reveals house prices have been rising for 6 months.
- But rising unemployment is now at 2.43 million people, 7.8% of the potential working population.
- And general government debt is now shy of £800 billion.
Around the world:
- France and Germany saw small growth in the last quarter, US decline slowed, and Asian economies are recovering, notably in China and India.
- Sterling is struggling against the euro and the dollar, but the Bank of England thinks this will help rebalance the UK economy, helping exporters, or those producing to compete with imports.
In the news this week - Mervyn King:
"How rapidly growth will pick up -- whether it will be plus a little bit in one quarter, minus a bit in another -- I don't think is the big picture at all"
"I think the UK is pretty well set for a recovery but the banking sector is not in good shape and it will take a long time before the balance sheets of the banks are fully repaired"
It all seems a bit vague. Britain is still in a poor economic condition. It needs to reign in its ballooning budget deficit, but precise timetables have not been laid out and indications have not been made as to where cuts should take place. We need announcement of a plan we can believe, a plan that can realistically work. A plan that is long-term as well as short. What we need is meat and bones.
Property: Can It All Come Good?
What do we have to look forward to in the short-term? At the end of 2009 we will say goodbye to our palliative perks such as zero stamp duty on properties below £175,000, perhaps goodbye tiny Bank of England base rate, and hello (again) VAT at 17.5%. We will say 'yes please' to getting our pensions later (if at all), nod in agreement with Dame Joan Broadwell's assertion that "The old will have to work", and be quantitively eased into 2010. But whilst headlines blow hot and cold with short-term governmental measures, many people will still feel a tight money-belt round their waist come 2010, 11, 12, 13, 18...
If you're planning on retiring soon, or want to have financial provisions in place for the future, it is clear that the only way to have any stability is to take a long-term view. Save-the-day (but not the decade) legislative whim (boondoggling) and an oscillating stock market cannot be relied upon. As Mark Twain said, "October: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February". (Pudd'nhead Wilson's Calendar for 1894). There must be a reason why the phrase 'bricks and mortar' is so comforting, and why nearly half of UK consumers believe that investing in property is the best way to maximise returns on their hard-earned money (as indicated in a recent study by Scottish Widows).
When we look at the 'oh they will!'/ 'oh! no! they won't!' mood swings of house prices in the current recession, it seems like everyone's having a Mrs Bennett moment. Whilst newspapers fan hysteria with the exact percentages that prices have risen in the last 48 hours, and start planning street parties and synchronised seal clap-clap ceremonies to celebrate house prices' return to sterling form, those with a little more experience can offer some advice that's slightly more sane.
There will be many factors affecting house prices; the number of properties on the market, seasonal boosts, housing demand, support to the market provided by the government, repairs to public finances, the extent of mortgage lending constraints, impact of rising unemployment, stock market wobbles, currency wobbles, negative public speech, the general election news and prospects, taxes... but by 2014 house price growth could conceivably be circa 10%. As to how it gets there, no one knows exactly. However, residential market forecasters have predicted 4 scenarios; two involve virtual stagnation, with bumpy roads, until 2012, at which point there is either a slow, steady growth or a rapid growth; of the other two scenarios, one suggests steady decline until mid 2010, followed by rapid growth; the other, decline until 2011, stagnation until 2013, and slow growth thereafter.
Essentially, no matter how the property market fluctuates in the next five years, it will be soon be back on a good growth trajectory. As seen in the graph, over the long-term house prices have increased above inflation. Since 1955 inflation has been approximately 5.5% on average, whilst house price increases since then have been above 7% on average. Whilst stocks behave in an erratic, volatile manner - up close an historical stock market graph is like a pattern of razor sharp dogteeth - the housing market is, with a longer term perspective, more secure - it's ups and downs are comparatively more friendly - and it's growth sits comfortably above inflation.
If we look back to history, Fred Harrison, Director of the Land Research Trust in London, argues that historically there is an 18 year cycle in property, with 14 years of rising prices following by four years of recession across the broader economy. Homer Hoyt argued for a similar cycle in the 30s, and others such as Dr. Fred Foldvary in the 90s. Harrison wrote "Boom Bust: House Prices, Banking and the Depression of 2010", examining 300 years of British economic history and data across four continents, concluding that this 18 year cycle was present, irrespective of distinct characteristics of each economy. This was written in 2005; and he wasn't far off. It is useful to look at history's patterns, and it is reassuring. Although there may be a downturn now, there will come an upturn. And for those who understand and can facilitate property purchase opportunites in the current climate, the rewards will be bountiful in the future.
Even over the past 10-15 years, the UK housing market has managed to rebound from events that were expected to have a highly detrimental impact. It is certainly more resilient than it looks. Large events such as the Asian and Russian financial crises of the 1990s, Y2K and the Dotcom crash, 9/11 and 7/7 terrorist attacks, the invasion of Iraq in 2003, the UK economic slowdown in 2004 were great shocks, but recovery did follow.
Historically, the property market has fluctuated, like anything, but it has natural cycles which can be understood and utilised, even in hard times. That's why, even in an economic downturn, property is still the best investment. When you can see the big property picture, and you know what to do with it, your future can be comfortably provided for. Property is a plan that gives you more control of your forthcoming financials, and is a long-term investment worth considering, whether you're 35 or 65.
See how property investment could work for you here.
Wise Words for the Recessionee
Promises make debt, and debt makes promises.
~Dutch Proverb
The gap in our economy is between what we have and what we think we ought to have - and that is a moral problem, not an economic one.
~Paul Heyne, 20th century economist
The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
~Ronald Reagan
Economic advance is not the same thing as human progress.
~John Clapham, A Concise Economic History of Britain, 1957
So long as all the increased wealth which modern progress brings goes but to build up great fortunes, to increase luxury and make sharper the contrast between the House of Have and the House of Want, progress is not real and cannot be permanent.
~Henry George, Progress and Poverty, 1879
The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life.
~Theodore Roosevelt