News Review: Economics
Earthquakes and war threaten global recovery by
Fionnuala Earley,
UK consumer economist, Royal Bank of Scotland
recent events across the world have been harrowing and in addition to the tragic human costs, there are likely to be some difficult economic implications. as conditions at the Japanese nuclear plants deteriorated sentiment about the effect of the tragedy on the global economy worsened. the closure of some factories caused worries that global output could be interrupted because Japan produces lots of components for goods finished in other countries. on top of this
the loss of nuclear capacity in Japan and germany’s decision to shut down seven of its 17 nuclear reactors as a precaution led to sharp increases in coal and gas prices. meanwhile, escalating
unrest in the middle east added to concerns that oil supplies could be interrupted causing oil prices to increase towards $120 a barrel. a stall in the global
recovery would be a blow for the uK economy because of the importance of exports to our own economic revival. a big concern is that the rise in energy prices is prolonged, slows growth and feeds through to inflation. most people won’t have the central heating
turned up in the summer but the cost of energy feeds into the prices of lots of everyday things that we buy, not least because of distribution. With earnings growth still
low and the potential for inflation to rise again the average household could be squeezed a lot harder than we thought and this is even before the chancellor’s spending cuts bite. the decision for the
monetary Policy committee then gets even more difficult. interest rate futures contracts are adjusting down as the markets expect the monetary authorities to be cautious. Swap rates have also fallen, bringing more competitive fixed rate deals to market which should
OECD chides UK housing market restrictions
The Organisation for Economic Co-operation and Development reduced its forecast for UK GDP growth in 2011 to 1.5% from 1.7% in its latest survey of the UK economy - significantly below the Office for Budget Responsibility’s estimate of 2.1%.
While supportive of the “ambitious” plan for
deficit reduction, the OECD warned that large cuts in public investment are a risk to long term growth. But it supported loose monetary policy to sustain the recovery even if inflation is significantly above target.
The OECD singled out the UK housing market for special mention. Its concern is that labour market mobility and hence economic efficiency is hindered by the high prices of property in the UK compared to incomes. And it thinks that the high prices are caused by insufficient housing supply. Even though prices have fallen by about 20% from their 2007 peak they are still high relative to incomes, especially in the South East of England.
22 mortgage introducer APRIL 2011
The OECD believes that this is because planning rules restrict the availability of building land and drives up prices. Relaxing these restrictions should cut the cost of development, make more projects viable and so promote growth and investment. The new homes bonus policy is intended to achieve this by giving local planners financial incentives to develop land. But it’s not yet clear whether this will actually lead to land being freed up in the right places. The OECD also recognises that supply is not the only issue and that demand needs to be kept in check too to avoid the volatility we have experienced in the UK. It suggests that changing tax regulations could help to curb price swings. It would be a very brave chancellor that did anything about that with the housing market in as fragile a state as it is now. The lack of demand is higher up Mr Osborne’s agenda, not just for the health of the housing market but also for the sake of housebuilders and the construction industry.
boost remortgage demand. But the
inflation
bogeyman is still there - and likely to get scarier the longer this goes on - reducing household disposable incomes and pushing the mPc into a tight space between a rock and a hard place.
Budget boost or bust
The £250 million set aside in the Budget for the FirstBuy Scheme which along with housebuilders will offer loans to help first-time buyers raise a 25% deposit, is of course welcome. But it’s not clear that it will have very much of an effect overall.
The Government estimates that 10,000 first-time buyers could be helped. This is great for housebuilders because this demand will be channelled into newly built homes. But it is not clear whether the policy will actually boost the overall numbers of first-time buyers or simply allow those who were going to buy anyway to do it a bit more easily.
Even if all of the 10,000 first- time buyers were “new” it is still unlikely to be enough to get levels of housing transactions up to more normal levels. Since 2002 the average number of first-time buyer loans made each month is more than 27,000. In January 2011 there were 10,000. It’s unlikely that these new borrowers would all come to the market in one month so, while helpful for the individuals, its scale is unlikely to be enough to change the market.
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