Good morning everyone. I hope that you all had a great holiday, most importantly spending not money but time with family and friends.
Over the next week or so everyone over here will be talking about what will happen to the booming (NEVER, written that before…kiss of death???) UK in 2014. The answer will depend entirely on how the following 5 topics develop; they are interest rates, continuing recovery, house prices, price inflation, immigration /Europe.
On interest rates, there has been a lot of media prominence given to a survey claiming that the Tories will stand a better chance of winning the next election if interest rates start to rise before that event in May 2015. On reading the story, it is really just a bit of mischief making, and to be ignored. Obviously, that decision when it comes is out of the hands of the politicians, but the issue will become increasingly relevant as 2014 matures. Going to be interesting towards the back end of the year, as broadly, the MPC would prefer to keep rates unch between March and September 2015 unless circumstances absolutely dictate otherwise. The two big picture issues to focus on are; the timing of the first rise in rates, and more importantly the perception of the ultimate destination of the rising interest rate cycle, over what period of time.
The Conservatives will want to convince the country that economic competence is a clear dividing line between themselves and the opposition, and growth returning to core way ahead of schedule is a good step in that direction. It would be a big ask to see the recovery accelerate from the fast pace set in the last half of this year, and as I posted last week, the nature of the recovery needs to be more widely spread to give this a chance. Again, the media over the holiday period has stoked up expectations by covering a really woolly item about the UK being the biggest economy in Europe by 2030! Big picture focus should be on the reliance of the consumer in supporting and driving GDP forwards.
Rising house prices; is it a bubble/are mortgages sustainable in a `normalised rate environment`/will the Bank step in? These are big issues in the UK. We have become a nation pretty much obsessed with house price values; and the feel good factor link to consumer spending and therefore GDP values, show a high correlation. The press is once more talking up prices nationwide, with next year predicted to show increases of 8 – 10%. There will be more stringent affordability restrictions imposed on lenders next year to try and counter this trend, and also expect a reduction in the `Help to Buy` scheme, maybe limiting the ceiling from £600k to £300k. This is going to be a very tricky equation to solve but no one wants a crash, and that will not happen in 2014. Big picture focus should be on house price surveys, the projected effectiveness of counter measures when they come along, and mortgage lending statistics.
Inflation is alive and well and living in the UK. It has been a source of conflict within the Bank for a long time. Faced with an out of date/inappropriate remit, the Bank has been unable to meet its 2% inflation target since November 2009. The latest trend as reported in inflation statistics show inflation moving lower, and closer to target. The probability however is that inflation will rise again in December. We all know that these numbers have little relevance to the experience of people, and standards of living have declined as real wages have failed to keep pace with even the official CPI numbers! Nevertheless, a return to within target CPI figures will be crucial to the health of the economy in the coming year. Major point of focus is the link between unemployment and inflation. Sharp falls in unemployment could trigger wage rises and therefore put more upwards pressure on inflation
Finally, under one category; Europe, and immigration. In parts of the country, the UK is struggling to cope with existing immigration levels, and the lifting of EU restrictions to Romanian and Bulgarian immigrants in 2014 will be one of the hottest topics for next year. To a large extent, the numbers of, and the degree of success in integration of immigrants from these countries, will colour the population`s wider attitudes towards Europe ahead of the referendum in 2017. Both the government and opposition policy responses to public concerns over immigration should be watched closely, it will be a major factor in the election of 2015.
An improving picture for the UK economy, certainly, and that has been reflected by the appreciation of sterling in 2013. The optimism for 2014 is generally justified and certainly in the first few months of the year should last. I hope to have pointed out the areas to focus on from the multitude of information coming your way soon, and success on these fronts will be important in maintaining the positive mood that we enter the new year with.
A booming UK in 2014?? Let`s hope so, it would make a nice change…..