What is the UK economic outlook post General Election?

As we see a (hopefully) sustained burst of sunshine and good weather for much of the UK we are also in a period where much of the economic news has taken its hint from this change to better conditions. In essence the house price and consumer borrowing boom created by the Bank of England from the middle of 2012 with its Funding for (Mortgage) Lending Scheme or FLS has been added to by the fall in the oil price and indeed other commodities that started in late summer 2014. I had previously wondered if the fading effects of the house price boom would mean that the current UK establishment had mistimed their efforts in terms of the electoral cycle but what in economics is called an exogenous factor means that in this regard they can sing along with Daft Punk.

We’re up all night to get lucky
We’re up all night to get lucky

Another stroke of luck comes for the way that the ECB has reduced Euro area bond yields via its QE purchases which has put downwards pressure on UK Gilt yields too.

 

Car Registrations

This morning has seen a boom area of the UK economy produce more good news. From the Society of Motor Manufacturers and Traders or SMMT.

Figures released today show 492,774 cars were registered in March 2015 – the best month since the twice-yearly number plate changes were introduced in 1999……… Registrations so far this year have increased by 6.8% to 734,588. The 37th month of consecutive growth for the new car market……

It appears that this is also boosting the UK car production numbers.

With 257,300 UK-built cars rolling off production lines in the first two months of 2015, UK car production is expected to exceed pre-recession levels this year, buoyed by a strong export market that delivered revenues of £26.2 billion in 2014.

Whilst this is overall good news there are in fact concerns. You see if we ignore the hype the UK car production numbers for the first 2 months of 2015 show a fall of 2% which must pose questions for the already troubled trade figures as registrations rise. Also in a familiar theme for the UK economy and another effect of FLS we see that car sales are being driven by this. The emphasis is mine.

New products and attractive finance packages underpinned by low interest rates helped deliver this record result.

The Bank of England’s Credit Conditions Survey released this morning backs up the impression of relatively easy credit availability and price.

Lenders reported that spreads on other unsecured lending products, such as personal loans, narrowed significantly in Q1 and were expected to narrow significantly further in Q2.

Lenders reported that the availability of unsecured credit to households increased in 2015 Q1.

So we have an old-fashioned UK style boom at play here as the effects of the credit easing come to play. We will have to see if it leads to old-fashioned style problems or just a sub-prime one. One difference of course is the way that some of this was originally financed with money received from PPI payment redress funds. Of course that also comes from the banking sector albeit by an often taxpayer backed route as we yet again observe rather a tangled web.

 

Business Surveys

More hopeful and clearcut was the news from the UK services sector yesterday.

The Index rose to 58.9 in March,from 56.7 in February, indicating a marked pace of expansion that was the fastest since August 2014.

So something of an acceleration with the future also looking bright.

Moreover, the rate of growth in new contracts accelerated to the highest since last September….The heightened positivity for the future resulted in new marketing campaigns, and new products as competition increased.

If we add in the already positive news received from the construction and manufacturing surveys then the conclusion was this.

The UK economy moved up a gear in March,
recording the strongest pace of growth since last
August. The three PMI surveys collectively indicate that the economy grew by 0.7% in the first quarter,
reviving from the slowdown seen late last year.
Faster growth of new business and improved
expectations of prospects for the year ahead also
bode well for the upturn to retain strong momentum
as we move through the spring.

Disinflation in the retail sector

It is perhaps a little concerning that the British Retail Consortium confuses prices with inflation but nonetheless the numbers will be welcomed by shoppers and consumers.

Prices in Britain’s shops reached another new low, this month by -2.1 per cent. That’s the deepest deflation rate since our records began in December 2006.

Oh and sorry they have also confused deflation with disinflation! Otherwise they completely contradict themselves here.

Consumer confidence has also soared to a near 13-year high……With strong consumer confidence and relatively benign macro-economic conditions we can expect the nation to respond with their feet or with a mouse click in the coming weeks.

What could go wrong?

The first thing that might go wrong is possibly already happening. For example as I type this the price of crude oil is pretty much unchanged in 2015 so far. However the UK Pound has lost around 6 cents so far this year against the US Dollar meaning that the petrol price falls of late 2014 and earlier this year are now over. For example petrol and diesel prices at the pump have risen for the last 8 weeks and average petrol prices have risen 6 pence to £1.1206 per litre.

If we factor this into overall upwards pressure for energy prices then we see that one of the factors which has boosted our economy is on its way out if oil prices remain here. This poses its own problems as you see if we look at what one might call underlying inflation in the UK economy or services sector inflation then it has been chugging along even in these disinflationary times at just over 2%. So we would return to target and end the “deflation” scare? Yep but of course we would also end the turbo-boost for the economy. This was reinforced by this from the UK Economic Review released today.

The median rise in weekly pay for continuously employed employees has remained at around 2% since 2012.

So if inflation returns to circa 2% and wage growth is same as it ever was (in the credit crunch) then we have more stagnancy for real wages. Or we have a long-term problem that we continue to struggle with.

Comment

So we see that the UK will cruise into the May General Election with economic growth likely to be solid/good and inflation close to zero. In Goldilocks terms the porridge will be “just right”. However unless we see further falls in the oil price then the UK tendency to institutionalised inflation will mean that real wages will come back under pressure again making the porridge in this area a bit cool. Just to add to the mixture the situation concerning trade and unsecured borrowing looks a case of porridge which is too hot to me and of course this has been a familiar feature in UK economic history.

So what does a new UK government want? For all the hot political air the best tonic would be a further fall in the oil price! Albeit that it would come with its own problems if the Scottish Nationalist Party were part of the government via the impact it would have on North Sea Oil and Gas. But by the standards of UK economic electoral situations it could be worse.

The Generation Game

Today’s Economic Review had some rare and welcome news for younger readers.

The median growth rate of earnings for those aged 18 to 24 is substantially higher than for other age groups, suggesting that young workers who stay in employment are relatively likely to move towards more highly paid jobs.

Big equity bids and deals

The £47 billion purchase of BG Group (British Gas) by Shell reminds me that such large deals are usually a sign of an equity market peak.

 

 

 

 

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14 thoughts on “What is the UK economic outlook post General Election?

  1. Hi Shaun

    My belief is that all this “good” economic news is an illusion and whatever growth we have is created by consumption and easy credit, as indeed you imply above.

    Also the news from almost everywhere else isn’t good: the US may be slowing to a crawl; Europe will never get better with the Euro; China may have a hard landing etc etc. You have to ask how can the UK be a beacon of growth with this background? The answer is of course easy credit.

    But you have to ask how indebted can people become? There has to be a limit and, in my view, once that limit is reached you don’t just stagnate you begin to fall apart; our economy is built on credit and it needs the drug to keep growing.

    My view is that economic situation will turn sour later this year for whatever reason (debt exhaustion; Ukraine; the Eurozone; Middle East – take your pick) and the “everything is awesome” meme is going to look decidedly sick. If I were Ed Milliband I’d be very content to let Cameron stay in office with an insecure majority and when the situation does turn to force a new election which I think Cameron would lose because people would then see that we are in a parlous situation not a new nirvana. Don’t misunderstand me I don’t think that Milliband has the answers; he doesn’t;it’s just a preference between groups with different non answers!

    • I think Cameron should have passed last time. Then he could have easily been in for a very long time starting now. Politics is about power so when the chance came he had to have it. I wonder that Milliband will be able to pass this time as you say.

      Also, as you say, neither of them have ‘the answer’.

    • Bob J, a good crystal ball gaze, I agree with your prognosis but not the timing. We have 3 further cash injections, pensions Lamborgini splurge 1, them housing and infrastucture splurge, then retrospective pensions splurge 2. This could go on for 3 years yet……

      Paul C

  2. Hello Shaun,

    for what ever the result , who gets in charge will find that rising oil prices will kill off any boom and we’ll be back to bust again

    I’d posit the GDP figures are so mangled now that any result below +2.5% is actually deflationary

    3% and above will be probable growth

    and nothing is going to change that as all parties are really just a colour now , choose a colour and thats it !

    the pension scandal will be the next big thing for any future government to sort out , just like PPI , haha

    Best not to vote , do you really believe in Homeopath voting ? ie your vote counts ?

    Gotta laff

    Forbin

    • Hi Forbin

      The oil price seems to be following the tactics of the Grand Old Duke Of York as after marching to the top of the hill yesterday Brent Crude has fallen by 5% today to US $56 per barrel. You make a good point about what GDP growth threshold is deflationary these days? The Riksbank pretty much agrees with you as it cut interest-rates to -0.25% after 2.7% GDP growth in Sweden….

      • Yes Shaun, hoping for Iran supplies to flood the market, although Dakota fracked oil storage hub could suffer earthquake and we might see a squeeze. Could go eiher way….

  3. I reckon it’ll be back to debt slavery.
    It’s one thing if you run up the debts yourself, but being slave to the banksters who created the debts really galls.
    Elections are neo-Liberal beauty contests now.
    I won’t be voting, as, whoever wins will make no difference.

    • Hi therrawbuzzin

      I have been a lifetime supporter of voting except for when I was too young to know or care but this time round is testing my resolve I have to confess. It is time for “none of the above” to be on the ballot box.

  4. A very good question Shaun. Economists were telling us people would be sitting on their hands until after the election but this doesn’t seem to be happening.
    Although generally I am not as pessimistic as some of your readers so much depends on the value GBP. I believe for some time with cheap money people will keep spending and this could be boosted with money withdrawn from pensions as the amount from PPI and injury/accident payments recedes.
    Whoever forms the next government schemes to aid house buying will surely continue for years to come.
    With low inflation,job growth and rising wages I think nothing will change anytime soon.
    What could go wrong? Well most new governments raise taxes when the election is won.The others you have highlighted.
    Well what of the future? Goldilocks situations like this are inclined to have a nasty ending but I personally don’t think we are there yet.

    • Hi Midge

      Elections usually some with forecasts/fears of a collapsing Gilt market and a plummeting UK Pound £. Often around a Labour win but by no means always. This time around is different in several respects. If we skip the political situation where an outright win looks unlikely then we come to the Gilt market where nobody forecasts a plummet as after all bond markets don’t fall anymore well outside situations like Ukraine for example! After all in a world where Switzerland issued ten-year bonds at a negative yield only today it is like an episode of The Outer Limits.That only really leaves the Pound £ and many places have forecast its fall throughout its recent rise so even they may be quiet.

      Mind you as nobody seems to think it possible……

  5. Hi Shaun,

    Depends on your time span. May – December 2015 I’d say steady as she goes (according to official stats anyway!) GDP coming in at circa 2.5% plus or minus 0.5%, beyond that I don’t know. I expect oil price to steadily recover to circa $75 – $90 a barrel (brent crude) over the next couple of years, but not in the next few months, so an ongoing slowly increasing drag on economic activity in the UK.

    My main concern is the GBP/USD exchange rate. I said a year ago I thought the “true” value of the USD was in the $1.50 – $1.60 range and I do remember you implying that would bring a great inflation surge but neither of us was to know what would happen to oil to assuage that shock.

    Now I think the $ is becoming over valued which as you say is starting to feed inflation with the oil price on what I believe to be an upwards price trajectory as more frackers cap their wells waiting for better prices the establishment can heave a sigh of relief as inflation returns. I still maintain that the Fed will start making moves to de valuation if the $ appreciation continues.

    Ftse wise watch the fireworks between now and the election and if we end up with a labour Government or labour led coalition then watch the fireworks continue for another few months after the election – I prefer candy floss to popcorn.

    • Hi Noo2

      Inflation is far from dead in the UK as the services sector registers either 2.4% (CPI) or 2.1% RPI. Makes a change for RPI to be the lower. It had better take care as it may soon become the official services measure!

      If we had cruised along at that sort of level of consumer inflation there would be no good news on real wages and a consequent dampening of the consumer boom. Should oil rally as you say we could see a scenario in 2016 where inflation pushes above target and the Bank of England yet again promises interest-rate rises. We would be back to Establishment 1 The People 0 as you say.

      Has peak popcorn passed us now?

  6. I guess we rumble on with cheap credit to spur growth until we get a major bankruptcy or some real-world collapse to trigger the correction. Does anyone expect the Fed to ever raise rates, given they’re having the exact same cautious conversations as a year ago? I can’t believe dollar investors buy the tape-loop rhetoric, they’re just choosing the lesser horror by nodding and going along with it. And that might sum up the Brit attitude to the easy credit/HPI party we’ve had since the mid-term coalition realized they couldn’t gee up GDP any other way. As for the politicos, it’s all about spreading fear, it strikes me. Fear of the plan stalling, fear of cuts, fear of the young. And maybe that’s what will save us, the birth of a generation-rent political movement…

    • “Does anyone expect the Fed to ever raise rates” Yes, me, provided the dollar stops it’s appreciation as the Fed is looking closely at the employment situation which is steadily improving with the odd aberration. The Fed is very interested in the emplopyment rate and is concerned things may get inflationary as the US reaches it’s maximum potential growth.

      When will this happen? Not sure but I’d say if the dollar stops appreciating and employment continues improving watch out this September/October.

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