A year ago I wrote about animal spirits and optimism, hoping that they would translate into growth, but I was pessimistic for the UK given the outlook for Europe. I was wrong. I am tempted to be really optimistic but that would be a mistake.
Let’s first consider what has already happened in the UK.
An Honest Outlook for the UK Economy
- Firstly, people believe the misleading data on house prices which are not rising as fast as they think. This has caused said people to experience the perceived wealth effect and subsequently increase their spending.
- Net mortgage lending has only increased very slightly to date. When the cash buyers stop entering the market there will be nothing to sustain prices.
- Secondly the growth in the UK car market at 17% is actually driven by people putting off the evil payment day: about half the new cars are sold on a Personal Contract Plan. This encourages the purchaser to enlarge the debt they already have on the vehicle, even though the monthly payment is reduced.
- British Banks are Basel 3 compliant (with the possible exception of RBS). The rules have been relaxed as a result of intense lobbying from France and Germany, which improves the outlook for the Eurozone because the rule change means less contraction of their loan book.
- The IMF has raised its forecast for UK growth to 2.7%. All growth forecasts will be higher if the expected inflation rate is lower, it is purely arithmetic.
- The latest data which suggests a GDP growth rate for 2013 at 1.9% is based on only 45% of sample data. Since 1998 there have been 63 quarters. In all but 7 there have been revisions which take place over three years after the quarter.
- The revisions tell us the recession was deeper than first estimated, but also the double-dip never happened.
- Currently economists are suggesting that the retail sales data for December at 5.3% up on a year earlier is inconsistent with the reports from major retailers. It expected to be revised downwards, as will the fourth quarter GDP figure.
- My guess GDP growth is 2.25% for 2014.
The Rest of The World
- USA: In order to prop up the USA , the Fed since the start of 2009 has created $3 trillion. $1 trillion in 2013! This new supply of money has enabled emerging economies to finance their current account deficits with ‘hot’ money.
- China: China remains a conundrum. They continue to have the ‘build it and they will come’ mindset. This maxim, financed by a massive expansion of new money, is making some Chinese people very rich indeed, and lifting everyone into higher average incomes. But now China needs $4 of credit to create $1 of added value. And $1.50 of this is for debt repayment.
- Japan: It is worth noting that Japan collapsed in 1989 due to excess capital investment financed by the banks. A year earlier Goldman Sachs had published a report confidently saying that by the year 2000, Japan would dominate the world. Does this sound familiar?
For more information and a full picture of the current economic outlook and what this means for your business you can download Roger Martin- Fagg's full economic update below.
(Feb 2014)
