News Review: Economics
The picture hasn’t changed but the risks are bigger
by Fionnuala Earley, UK consumer economist, Royal Bank of Scotland
We are more than half way through the year now, so how different is the uK economic and housing market outlook than we thought at the start of 2011? the answer is not that much. Sentiment has weakened
since the start of the year and the outlook for each of the major drivers of the economy is similar, if just a little weaker. So the overall recovery is likely to take longer and interest rates are likely to remain at 0.5% for at least another six months.
Drag on economic growth the level of growth in any economy depends on four main drivers: consumption, government
the 1970s. and even though inflation fell slightly in June, the pressure isn’t really off because energy bills are going to rise this winter. the good news is that the
labour market is still well behaved. unemployment, at 7.7%, has remained well below the double-digit levels reached in previous recessions and employment has increased by 309,000 in the last year.
Trade and business investment Without a healthier consumer sector the uK economy will have to rely on the other drivers. We know that there is nothing coming from the government, which accounts for about one fifth of demand. that leaves us looking at
spending,
business investment and net trade (exports minus imports). in order to grow, total output has to increase, so if there is sluggish demand from one sector of the economy, this has to be compensated for by expansion in another. in the uK, consumption
accounts for about two thirds of total demand, but the household sector is feeling the pinch. High levels of household debt still need to be addressed, but with inflation on essentials, such as food and energy, eating up disposable income, this is going to take a long time. real household disposable income fell by 2.7% year-on-year in Q1 – the biggest fall since
business investment and net trade as sources of growth for the economy. one depends on confidence and the other depends on the pace of global economic growth and our competitiveness in the world’s markets. the uK has improved its
trade position and rebalanced towards exports. a relatively weak exchange rate has helped, but a slower pace of global growth is working against this. Some of this could be temporary because of the interruptions to global supply chains after the earthquake in Japan, but after a good start to the year there is some disappointment that uK exports haven’t continued to grow as fast. investment is still lacklustre.
But it’s not because there aren’t any funds to invest. in general companies’ balance sheets are quite healthy. the
22 mortgage introducer AUGUST 2011
big disincentive is uncertainty about the future with trouble in the uS and europe adding to jitters about the strength of the global recovery on top of concerns about the health of the domestic economy.
“If the auster- ity measures prove too much for the UK to beat, this could push the econo- my into another recession”
A weak housing market of course weakness in the household sector and uncertainty about the pace of the recovery is not good news for the housing market. We still expect some modest falls in house prices in 2011 but think that things will begin to recover from the end of 2012. a fall of about 3% by Q4 2011; a broadly flat market by Q4 2012, followed by a modest recovery. transaction levels are
low and there is little to boost them. Poor household finances and little confidence in the market are drags to a recovery, especially when there are additional prudential
requirements
likely to hinder the availability of finance. But the good news is that the labour market is still alright. With some income, albeit reduced, coming into households, and interest rates at low levels, we have avoided
large numbers of forced sales, and this has helped to keep the market relatively stable.
The risks have changed overall, the picture hasn’t changed a great deal and neither have our expectations about the speed of the recovery. But the risks are bigger.
if the austerity
measures prove too much for the uK to bear, this could push the economy into another recession. the resulting rise in unemployment, bringing with it increased numbers of forced sales, would push house prices down much faster and reduce demand even more. there is also uncertainty
about inflation. the monetary Policy committee (mPc) thinks that it’s temporary enough not to cause a wage price spiral. But there is a risk that this is wrong and that by allowing rates to stay as low as they are now, stores up trouble which would mean even higher rates in future. But there is a new and
even bigger risk that wasn’t as apparent at the start of the year – the risk of sovereign debt default in the eurozone. the domino effect of a default in europe could be nasty, not just for the pace of global growth, but also for the financial system. So the picture is much the
same as six months ago but with darker clouds on the horizon. However, the silver lining is that interest rates will stay lower for longer and this will help to support the economy and the housing market through the hard times.
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