Market update

Posted on 21 Oct 2009 by The Manufacturer

As world business wounds begin to heal Howard Wheeldon assesses where we're at and asks who are we to believe...

All the positive economic surveys we’re reading, not to mention the shock of CPI inflation falling to just 1.1%, has got a lot of people suggesting Britain could at long last be turning the corner from recession to growth. Maybe it is so. But then again, maybe not just yet! After all, few can have failed to notice that within the raft of recent member response type surveys plus those that have seemingly been better researched by academics suggesting that things are looking up always appear to come with negative caveats. Take one published last week from the British Chambers of Commerce. After trawling through responses from 5,500 members, the BCC says that while business confidence is improving the economy is still frail. Too right! Another survey, this time from the British Retail Consortium, informs us that retail sales rose a somewhat spectacular 2.8% in September against the same month in 2008 but that “we shouldn’t get carried away”. OK, so the BRC are always moaning about something and must be pretty annoyed that they can hardly ask for rates to be further cut! Bringing up the rear of those presenting a message about the UK economy last week was the Royal Institution of Chartered Surveyors. This organisation has decided to put out a somewhat unconvincing story that tells us the number of its house agent members reporting rising house prices actually rose last month to the highest number since May 2007. Great for some of course but while they admit this situation is mainly due to the lack of supply they are also forced to admit that the main beneficiaries appear to be London and the South East. The positive story they talk certainly isn’t universal across the UK.

With official Q3 GDP figures due this week we will be able to learn whether political and other euphoria of late has been justified, meaning that Britain either returned to or was pretty damned close to returning to growth. I am not a betting man but for the moment my own view remains that at best Q3 GDP figures will show there was neither continuing contraction or official return to growth. It is certainly true though that the UK economy is better today than it was at the start of the year. While shops are hardly buzzing it is clear that the level of footfall, activity and actual buying has improved for the low point earlier this year. This is hardly surprising really, particularly given that interest rates are so low. But it is certainly true that compared to a few months ago for those that still have a job and can afford to ignore the huge public sector deficit that all of us know will have to be paid off at some point (meaning there is potentially a lot of pain ahead) it is certainly true that the feel good factor has improved. For others though, like those that have lost their jobs, there are no signs of an imminent resurgence of employment activity beginning soon. Neither is there an end to further predicted job losses and the natural fear that many will have of losing their jobs which is presumably why some of the many August economic bodies that we listen to disagree with both public and political consensus that life is on the up. For instance, just last week the National Institute of Economic and Social research told us the UK economy failed to grow in Q3. And just where is the improvement in air travel that might just indicate things are moving in the right direction?

The above thoughts may beg the question who should we believe? Those that protest a view that things are now on the up or those of us that worry about what happens when inflation begins to reappear, when commodity prices eventually rise on the back of sustainable global demand, when interest rates are forced to rise to give sterling back some value perhaps or just to hold back resurgent inflation, when the economy is slowed by demotivation, by demands for higher taxes to help pay down the vast debt pile built up, by the effect that public sector spending cuts have on increasing the numbers of unemployed and so on. We should not believe the politicians but then again, it may not be right to envisage the UK situation becoming quite as bad as just described. Thus it may not be right to accept all that the prophets of doom say either! In the world of reality though I doubt that those that have a modicum of common sense will set much score by what estate agents say. Indeed, by their own admission it seems that house price rises seen in recent months have actually been reasoned by acute shortage of supply – something that I fear over the last three weeks may now have been remedied. True, the return of first time buyers to the market should be a very positive sign here and it is they that have been responsible for a sharp rise in the numbers of new home loans.

For all that, whilst I am bearish about the possible sustainability of any house price recovery seen so far this year, I don’t envisage a return to house price depths seen late last year. House prices are of course a significant indicator of consumer confidence and something that if I am right to be somewhat sceptical meaning that we do shortly see the beginnings of reversal in recent rising price trends particularly in areas such as London and the South East, we could soon also see a marked deterioration in consumer confidence as we head ever closer into the General Election.

Only a fool could ignore the fact that government measures to stimulate the economy really have provided considerable benefit – as of course have measures taken by many other governments across the globe. And while it may be too early to say this with hand on heart, it does now seem to me that the battle to stop global recession moving toward the possibility of global depression has likely been won. But even if one hopes that success on that score internationally can probably now be assured, with such high levels of debt to address there are plenty that believe the prospect of a double digit recession will occur here. Even so, taking account of huge competitive benefits made available from the drifting value of sterling for the remaining brave handful of manufacturing exporters one may well feel that measures taken by government to help carmakers sell more cars at home may now be past the best. In other words, even though the car scrappage scheme was extended a couple of weeks ago it seems to me that most of the business that was going to be done on the UK scheme may already have been done.

Another worrying factor that we should not ignore is that long lead industries such as aerospace and defence that have so far been somewhat benign in terms of witnessing visible declines could well now see increasing impact of the downturn as a result of government spending decline and, in the case of commercial aerospace, further order cancellations and delays. Whatever, while the rise in manufacturing output certainly rose during the summer in response to various government stimulus measures we now expect to see a fall off in demand. Predominantly that can be put down to returning domestic car production but for all that we must remember that the amount of available value added to the British car manufacturing sector is greatly less than it was twenty or thirty years ago. Honda may make engines and cars and Ford may still have the engine manufacturing centre of excellence for a big part of its European car production here but for the most part all that the UK does today is assemble cars made up of parts imported from abroad.

Somewhat interestingly, on balance it seems that press and media have been setting far more store on reports with positive UK economic undertones than they have on the fewer negative ones around. They have also opened the debate on whether it is right for government at this stage to concentrate on cutting the deficit or whether this should be perhaps put aside until the recovery of the economy is proven. True, a falling pound helps to cut the level of built up deficit although in the case of the UK the continued feasibility that sterling will fall should not be a tree for this or the next government to climb. No matter what, if international confidence in the British economy is to return then the government needs to be seen addressing the vexing and unacceptable levels of current or envisaged public sector debt.

Given that the world economy really does appear to be back on the mend we all have ample cause to be thankful. That at least means that whatever may be in store for the UK economy in the months and years ahead one may say that it could always have been worse. What we can probably be assured of is that on top of the need to slash public spending and likely raise even taxation further over and above what has already been outlined by the current government the UK could soon face the additional ignominy of rises in commodity prices further rocking the boat. Oil, metals and minerals are all hugely important to the needs of the UK economy. Today though it looks as if those worries are somewhat too early – some would say even misplaced as news that Consumer Price Inflation (CPI) fell by a much higher level than expected to just 1.1% last months from 1.4% in August. The Retail Price Index (RPI) also continued to recede – falling to -1.4%. So, to all intents and purposes inflation has been beaten again and the word deflation is again being heard. Not for long I venture to suggest!

By Howard Wheeldon, senior strategist at BGC Brokers