Economic outlook for the next six months

Reader writes

What is your outlook for the economy over the next six months to a year in terms of growth?

The ‘economy’ is a big subject. For some it could mean house prices and for others it could mean the returns on their investments. I have covered these two over the last month so no need to for me to dwell other than saying that I see no reason for changing the view I had in 2003 that the property market was overheated then. We have five years of excess growth on top of that to somehow account for, coupled with less money in the consumer’s pocket. Because of the ‘denial’ syndrome, property prices will remain flat until forced sales bring out the real price. The great public tends to ‘anchor’ themselves to a previous price of any asset and that is generally where most people go wrong. Anything that can get cheap can get a lot cheaper. I am very confident that will happen.

For me the key issues relate to inflation so let’s look closer at that. We all know the Bank of England has a target inflation of between 2-3%. It’s widely expected that this inflation could hit near 5% in September/October leaving the Bank the enjoyable task of scribbling letters to the Chancellor. Much will depend on how much of the energy costs are passed on by the utility companies.

Energy is one of the biggest issues driving inflation. The recent CPI report showed that gas, electricity and petrol accounted for 1.4% of the 3.8% inflation. Take out the impact of food prices and you will see that inflation comes down to a mere 1.6% so don’t eat, drink, drive or try and stay warm, and everything will be fine.¹

I have recently covered the issues with the price of oil and food, and put more than 50% of its meteoric rise down to the institutions purchasing futures in them. Whilst much of the recent headlines continued to say that it was driven by demand, we pointed out that demand had been falling for some time, and that this ‘noise’ was effectively being created by the market makers. This has come out in the open over the last few weeks as I suspect those exposed to commodity futures have offloaded them and commodities have bombed.

I am pretty confident that this will have a collapse in the cost of inflation over the next six months and this will have a very positive impact on the economy over the next year. With the threat of higher inflation lifted, the Bank of England is in a better position to ease interest rates and inject cash into the economy, something which the housing market desperately needs, although I suspect this is too late.

The consumer does need an injection however. Over the last year they have seen the cost of goods rise by more than their incomes. Add in higher national insurance, the abolition of the 10% tax band and the disappearance of the upward only value of property, it’s easy to see why people are spending less – because they don’t have as much. It won’t be long before that unrest makes its way through to higher wage demands, something the government will not want, the ugliest inflation – wage inflation.

With all that in mind, the consumer will be spending less, so costs have to come down and so we have another downward pressure on inflation. When all this comes through into real prices and in turn to inflationary figures I suspect it will be a surge, but it won’t be without pain in between.

One thing to keep in mind that may give you comfort. According to JPMF, 67% of the UK’s economy (where they will get most of their taxes from) relates to spending on the high street. They will need to stimulate that sooner or later and the only real way to do that is to drop the mortgage rate or taxes.

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Source:
¹ Iggo’s Insight

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Tags: Bank of England, house prices, inflation, UK economy

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