News Review: Economics
Weaker global economy could mean UK boost by
Fionnuala Earley,
UK consumer economist, Royal Bank of Scotland
conditions in the global economy continued to weaken in the last month and this has only added to uncertainty about the sustainability of the global recovery. no wonder stock markets are still jittery. the BBc global index, which covers europe, asia and north america, has recovered a bit since the trough in the middle of august, but is still about 10% lower than in July, and remains volatile. the FtSe has also recovered a bit but european markets continue to suffer. Weak growth in France and germany in Q2 has hit confidence in the pace of the eurozone recovery while the ongoing issues with sovereign debt in the peripheral countries is adding to worries too. the oecd and the
international monetary Fund have also raised concerns about the pace of the global recovery. the oecd’s assessment of the situation is that “economic recovery appears to have come close to a halt in the major industrialised economies, with falling household and business confidence affecting both world trade and employment.” But the good news, as the
oecd points out, is that even though it has slowed slightly, growth is still strong in most emerging economies. this means that uK business has to work even harder to get its
share of these growing export markets. the new managing director of the imF, christine Lagarde’s,
controversial
comments about the uK’s economy was uncomfortable listening for uK chancellor george osborne. But there is no getting away from the fact that the uK is vulnerable to economic weakness in the rest of the world, particularly in the eurozone and the uS. While osborne is well
aware that he needs to be seen to be entirely committed to a credible deficit reduction plan in order to maintain confidence in the uK, he must also recognise that we cannot insulate ourselves from rapid changes in the rest of the world. the advice to be “nimble” and not to shy away from adjusting the programme if the world economy deteriorated further warrants consideration.
UK boost monetary
policymakers
in the uK do seem to be considering the possibility of more stimulation. While it seems that the mPc still thinks that conditions do not yet warrant more quantitative easing, the vote may have been swayed a little by a desire not to surprise the markets unnecessarily. the minutes of the mPc’s September meeting revealed that adam Posen voted for a £50bn increase in quantitative easing. His call for still greater measures to encourage credit growth may be a signal that others are moving towards his more proactive stance. For the housing market, a
20 mortgage introducer OCTOBER 2011
slowdown in growth is not great news and suggests that activity levels will remain very low for longer still. Households are a big drag on the economy as debt has to be repaid. But low wage growth along with high inflation, particularly on essentials, means that households’ real personal disposable income is falling; a position we haven’t been in since the 1970s (chart 1). Without income growth the prospects for a swift recovery in the housing market are slim.
Silver lining But the good news for the housing market is that slow growth has changed the future path of interest rates. about this time last year the consensus was that interest
rates would begin to increase from around about now, continue to rise and reach 4.5% by 2014. the slower recovery, particularly because of the drag on households, means that rates are now unlikely to begin to rise until Q3 2012 and reach only 1.75% by the end of 2014. this has a pleasant knock-on effect on mortgage costs. chart 2 compares the difference in mortgage payments from the peak under old and new interest rate assumptions. it clearly shows that the prospect of rising payments is now a lot further away. and with that support, the case for a stable but slow market, remains more likely than a huge tumble in house prices despite the turmoil in the world economy.
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