eInsight, Economics Update Bulletin, January 10' _________________________
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Happy New Year__________...and welcome to the first eInsight Economics Update for 2010. With a general election looming and economic recovery under way, we have collated expert perspectives on some of the most interesting economic developments and indicators so far this year, providing you with thought-provoking and relevant issues to begin the new decade. We hope you find it interesting and welcome your comments. |
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Positive outlook for 2010 but challenges remain »
2010 will be the year that the UK economy turns a corner. As the last major developed economy still in recession, the UK has been slower to return to growth than international competitors. Politicians and businesses alike will be hoping that the GDP release at the end of January shows growth.
Volterra’s forecasts suggest 2010 will see GDP growth of 1.8 per cent. Credit conditions will continue to thaw slowly and levels of mortgage lending are expected to rise. Consumer spending has already shown signs of recovery, and the increased spend over the Christmas period will only be good for retailers. The devaluation of sterling over the course of the recession has already fed through to increased exports and an improvement of the UK’s balance of trade.
Despite 2010 being a year of economic growth, challenges will remain. Unemployment, as a lagged variable, is likely to continue rising for at least another 6 months. Interest rate rises will put pressure on mortgage holders, who have so far benefitted from a very low base rate. The increases in VAT and national insurance and the new top rate of income tax may have a small downward effect on output.
GDP Growth and Forecast
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European economic confidence grows »
Recent results published by the European Commission in Brussels have provided an optimistic outlook for Europe’s economy. The Economic Sentiment Indicator’s (ESI) monthly figures show that economic confidence in Europe has continued to grow from November 2009. This figure has increased since a trough in March 2009. The index is now at pre-Lehman levels.
The U.K. in particular showed a large improvement in economic sentiment with the index rising over 8 points between November and December 2009. This number is due to a striking improvement in sentiment within the British service sector.
Overall the improvement across Europe comes from a greater confidence in industry, spurred on by a marked increase in the manufacturing sector. In Europe the manufacturing sector has grown for a fifth consecutive month. The Euro Zone’s largest economy, Germany, has reached a 17 month high for both business confidence and trade surplus.
Although this is encouraging, the ESI figures do not show a full recovery. The index for the E.U. remains below its long term average of 100. Moreover unemployment, now at 10 per cent across the Euro Zone, is at an 11 year high.
European Consumer Confidence Indices
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Figures for new industrial orders in the European Union have been published recently by the statistics office of the European Union. These figures give an indication of the future level of production. They now show a decline in almost all member states, after positive figures for several months. Actual industrial production shows a similar pattern. Are these figures the first sign of a double dip in economic growth?
One reason for the drop in industrial orders is that government spending, the main cause of GDP growth, is gradually being withdrawn. As governments are stopping their fiscal and monetary programs, we might witness another decline in economic growth due to the underlying economic structure having not recovered fully.
Interestingly, UK industrial orders grew in the most recent data.
Whether the recent decline in the Euro area is just a blip in the statistics or whether there is an underlying structural problem will become apparent as we move forwards in 2010.
European Industrial Orders
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London's International Finance Centre Status »
The announcement of a 50 per cent special levy on banking bonuses this year is making London a more hostile environment for the financial services industry. Will this lead to a mass exodus of financial institutions from the City?
Currently London holds the largest market share in the world for many types of financial transactions, for example initial public offerings and over-the-counter derivatives. The City will be unable to hold this position if banks and other major institutions were to settle elsewhere.
Hedge funds are the most mobile of financial institutions, and they would be expected to be the first ones to leave. Several have already announced the opening of new offices in Geneva. However, only the relocation of a major international bank would have a significant impact on the position of the City.
So where would financial services go if they were to leave London? Hostility against Wall Street bankers in America does not make New York the automatic first choice. Asia will probably become more important as a financial centre, with Mumbai and Shanghai expressing ambitions to become global financial centres in the future.
Global Market Share of UK Financial Services
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Commercial property recovery »
Prices of commercial property (office blocks, industrial sites and shops) fell dramatically during the recession, shedding around 45 per cent of their value. This was significantly worse than the 21 per cent fall experienced in residential property prices.
Since the trough in prices in late 2009, commercial property has risen in value by 5.4 per cent. November posted growth of 2.4 per cent alone, which is the strongest monthly growth rate in 15 years.
On the back of this growth, share prices in property-related companies on the FTSE have outperformed the overall index. Managed property funds have also done well, with growth of 10-15 per cent over the past 6 months not uncommon.
A number of factors are driving this strong recovery. The sheer size of the fall in values meant that yields on commercial property topped 10 per cent in some sectors. These yields represented a significant uplift on cash deposits and government bonds. Furthermore, the weakening of sterling has meant that to overseas investors the fall in property values is exaggerated, appearing as a 50 per cent fall to a dollar or euro denominated investor.
As supply remains constrained, these factors have driven a recovery in property values. However, there is growing concern that a potential ‘double-dip’ is looming. This would occur if new supply floods onto the market and undermines the fledgling recovery.
The occurrence or otherwise of the double-dip is likely to be the key theme of 2010 in commercial property. With high-street banks heavily invested in commercial property, if a double-dip were to occur it would have implications for the wider economy.
Capital Value Growth of Commercial Property
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Households in the UK have been increasing the amount they save over the past year. As of the second quarter of 2009 households saved on average 5.6 per cent of gross income (income after tax). It is widely expected that as more recent data is released it will continue to show a strong upwards surge in the savings rate.
As the UK headed into recession in early 2008, UK households were actually net dis-savers. At the same time household equity withdrawal and credit card debt was mounting. This over borrowing played a central role in the subsequent recession.
Now households are undergoing the opposite process – retrenchment – as individuals seek to improve the state of their personal finances.
The economics of whether this is a ‘good thing’ are not entirely clear. Whilst a reduced reliance on credit would strengthen the economy over the longer term, in the short term consumer spending will be a central aspect of a sustainable recovery. Increasing consumer spending will be needed to shift the impetus to recovery away from the public sector (i.e. the fiscal and monetary stimulus packages) and towards the private sector.
Household Savings Ratio
Using longer term historical data we see that the current savings rate remains low. In the late 1970s savings as a percent of gross income reached 14 per cent, and even in the build up to the 1990s recession only fell to 3.3 per cent. The last time the country experienced a lack of savings similar to the present was in the 1950s as the UK continued to deal with the economic consequences of war.
Household Savings Ratio - long history
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