The twin economic challenges facing the UK post-election are the trade deficit and house prices

This is definitely the morning after the night before. Yes I am at this point discussing the disaster that was had by the UK polling industry! Did they recruit from the Bank of England forecasting department or perhaps the Office for Budget Responsibility? For foreign readers the pollsters displayed rating agency style accuracy by forecasting a neck and neck election which somehow morphed into what looks like a Conservative majority. A very wide miss which will damage their reputation for quite some time. Although to be fair one at least has demonstrated some good grace. From Stephan Shakespeare of YouGuv.

A terrible night for us pollsters. I apologise for a poor performance. We need to find out why.

As to the result well it has been summarised with references to Maggie Simpson with her yellow face and blue body. However we also received today updates also on the two major economic issues facing the UK.

House Prices

One view of policies likely in this area has been provided by the stock market. Can anybody spot a theme in this from @econhedge ?

Foxtons gains 7.5%, Savills gains 11%. Countrywide adds 4%. Online property portals Zoopla and Rightmove add 4.7% and 5.1% respectively

Indeed the Financial Times also gets on the case.

Houses worth over £2m could see price rises of as much as 20 per cent in the next 12 months, Mr Mead predicted, and could double in the next five years.

There will be a renewed flood of cash into the capital’s housing market from foreign buyers, he said.

Giles Hannah of Christie’s International Real Estate said that buyers from Canada, the USA, the Middle East and Asia would buy in London, as they will now “view the market as a safe haven to invest in”.

Of course that is all speculation and in my opinion the last thing that the London property bubble needs is more inflation! In terms of actual data the Halifax has been on the case this morning.

House prices in the three months to April were 2.2% higher than in the preceding three months……… annual house price growth increased slightly, from 8.1% in March to 8.5%.

Exactly how does this work with an official inflation target of 2% per annum? Of course it does not which is why the UK establishment resists any change to the fact  that the UK CPI consumer inflation measure excludes owner occupied housing costs. In a way the Halifax rams this home.

This combination has kept house price inflation steady in recent months with prices increasing by 2.2-2.6% on a quarterly basis and at an annual rate of 8-9%.

it even points out that house prices are moving ever further away from wages.

House prices are continuing to increase more quickly than average earnings despite the return to real earnings growth over the past few months.

With the annual rate of earnings growth being 1.3% in February I think we can say that house prices are not being driven by wage growth? We await what house price friendly moves the new government will add to its existing portfolio but is there much else left other than trying to push mortgage rates even lower? This of course returns us to my view on the likely next move in UK Base Rates being down.

My view on Base Rates will be reinforced in the UK Pound continues the strength it has shown overnight as it has risen above US $1.54,185 Yen and 1.37 versus the Euro. At such levels it is heading towards being the equivalent of  in monetary policy tightening of Base Rates being 1% higher than a year ago. The Bank of England will be discussing that as I type this although I do not expect a change on Monday. As to the currency rise well maybe it is at least partly due to the property market. From Henry Prior.

2x emails from clients by 09.30 saying “go”. One spending £5m, one £10-£15m

Balance of Payments

A rising exchange rate brings us to another achilles heel of the UK economy which is our trade position which is in the news this morning. First let me remind you of the underlying situation which if the official statistics are any guide is dire.

However looking over a broader time period shows a general deterioration in the current account; the deficit over the 2014 calendar year as a whole was £97.9 billion (5.5% of GDP), which was the largest figure since comparable records began.

However there was some hope of an improvement at the end of last year so now we have the full data for the first quarter of 2015 let us take a look.

In quarter 1 January to March 2015, the UK’s deficit on trade in goods and services was estimated to have been £7.5 billion; widening by £1.5 billion from the previous quarter.

In fact both our goods and services position deteriorated in the first quarter of this year making the hopes of an improvement fade. So we find ourselves in a continuing deficit situation here which of course does not go well at all with the rally in the UK Pound overnight. It is the sort of situation which led the band Ace to pose this question.

How long has this been going on?
How long has this been going on?

In terms of a balance of payments deficit it feels like forever and has been (lost) decades. I have written in the past (2nd of April) that I feel that our services performance has probably been under-reported but even so we are on a road to nowhere with this problem. It is an area where we need to improve our data and statistics and perhaps the money below would have been much better spent at home.

The International Monetary Fund (IMF) and the United Kingdom’s Department for International Development (DFID) have launched a new project to improve macroeconomic statistics in 44 countries in Africa and the Middle East. DFID will provide £6.2 million (about US$9.3 million) over the next five years to support the project.

Some of you may already be thinking that UK pollsters could have done with the money too!

Oh and as I have pointed out before the UK is a remarkably good European for which it rarely gets the credit.

By area, the UK’s deficit with the EU widened by £1.6 billion to a record £21.5 billion, while the UK’s deficit with non-EU countries narrowed by £0.8 billion.

The idea of them cutting us off from trade is beyond laughable if you look at those numbers. Also the good news above did not require any union indeed it was with a country which forcibly rejected it some time ago.

Outside the EU, exports to the USA reached a record high £11.5 billion.


In a way for the UK economy one could summarise matters with an album title from Tom Petty and the Heartbreakers.

Damn the torpedoes (full speed ahead)

Or it would be full speed ahead if the economic growth figures had not showed a slowing! Perhaps some of that will be revised away as I discussed on Wednesday but we march onwards with a bubblicious housing market and continuing balance of payments problems which have tripped the UK economy up many times in the past. What could go wrong?

As to the election itself well here is a song from my album of the day for the losers as the winners do not need one.

Baby, even the losers get lucky sometimes
Even the losers keep a little bit of pride
They get lucky sometimes

Meanwhile yesterday’s European bond market crash had disappeared like the evidence of a shower on a hot summers day. As the equity flash crash has been blamed on a semi in Hounslow I do hope that this particular flash crash does not get blamed on a David Brent in Slough!


24 thoughts on “The twin economic challenges facing the UK post-election are the trade deficit and house prices

  1. Will the HMG change ? they havent in the past 30 years Shaun . No need to think the current bunch will anything meaningful about either trade or housing

    and as the economy slows and inflation picks up ….

    I predicted a major event after the elections and in the may june/juky timeframe . I think I’m wrong now , it looks be delayed until christmas ( and after that I’ll give on predictions as they appear to be difficult ……..)

    With a majority it will be interesting times for the UK ….. SNP majority that is 😉


    • Scotland may not be independent (yet), but has voted against neo-liberalism, against austerity, and has deliberately withdrawn from Westminster-based politics, by voting for a party which could neither possibly be govt. or opposition.

      For Scotland, read 56 SNP, 1 Toerag, 1 Red Toerag, 1 neo-Liberal Democrat.

      The end of the UK approaches. Sooner the better.

      • dunno about better or sooner

        inevitable most certainly agree on that

        the die has been cast and the players assembled

        “Cry ‘Havoc!’, and let slip the dogs of independence ! “.


      • Reports of thuggish SNP supporters intimidating voters suggest that an independent Scotland would rank lowly on lifestyle quality indexes, etc.

        If their policies were any good – they wouldn’t need brownshirt tactics.

        • ok I know this will upset some people but aren’t they Nationalist and Socialist ?

          erm …

          ( sorry Shaun )


        • The proposition that the SNP encourages, in any way, thuggish behaviour, is a deliberate, black lie.
          As for intimidating voters, pensioners were told that they would stop getting their pensions in an independent Scotland last September.
          Politics is dirtier in Scotland, and it is so because the neo-Liberals (libdem/con/labour) are so desperate to prevent a successful independent Scotland, that there is no low to which they will not stoop in their attempts to frighten people, back into their vile nest, or blacken the reputation of the SNP.

          Scotland has rejected neo-liberalism, utterly, unambiguously, and the idea that Scots were strong-armed into doing so deceives nobody.

        • Forbin.
          FYI, it is the Scottish NATIONAL Party.
          I.E. A party which seeks nation status for Scotland.
          It is not a NationalIST party, and it is barely socialist, although it may seem so when juxtaposed with Westminster’s Starve-the-poor-and-all-the-phoney-lead-swinger parties.

  2. Hi Shaun

    As you say, and many would agree, our economic performance is less than stellar and is a good deal less sparkling than the MSM would have us believe.

    I believe that the new (old) government will do everything to keep house prices high but you cannot defy gravity forever and there has to be a point of debt saturation, and not just for housing. However, we will I am sure get HTB No…. and a possible stealth backpedalling in the MMR; anything to keep the plates spinning.

    I think the Ponzi will collapse in the next few years and the next bust will be worse than that of 2008; let’s face it we are in a worse position now than then. If inflation does go up significantly, which it may well do, then can the BOE “look through” this yet again? I think not and if the markets come to the conclusion that they have, in effect, lost control, then they will force an increase in rates and the meme that “interest rates will only increase gradually and reach 3% by 2025/35/45…..” will go out the window. My view is that the BOE will never increase rates voluntarily; we have too much debt and the banks would be insolvent (they are anyway but are not perceived to be); they will only do so when forced and that would mean a much more rapid escalation in rates.

    I think this was an election to lose, quite apart from the ructions which will be caused by the Scots and a possible EU referendum.

    • watch for the housing assoc being stripped of assets

      then if we’re lucky BTL landlords having to sell off their assets too….

      oh hang on , the BTL and the Duke will stop voting tory if they do ……

      uh oh


    • Hi Bob J

      I thought that the last election was likely to be one too lose and yet in a way the can has been kicked ever further and the PM remains the same and indeed stronger. Of course for the minority party in the coalition 2010 was an election they now probably wish they had lost.

      So the lesson as you say is to expect Help to Buy and monetary easing on its way ” To Infinity and Beyond”

  3. Hi Shaun,
    I think you are right to worry about these factors and also the lack of progress in the rebalancing of the economy toward manufacturing. The economic landscape has just been flattered by a recent spell of lower inflation which is more about the price of crude oil than anything else. If DC can pull the rabbit out of the hat and build on these sand-based ‘foundations’ so that everyone will benefit as he has promised today then fair play to him! I remain sceptical to say the least.

    • Hi Zummerzetman

      The problem is that pretty much all the speeches today were of a much higher class than what we got in the election campaign. Now it is over we get at least some of the truth for a bit! But soon I fear it will be back to business as usual with more house market pump priming and us more exposed to the deficits I discussed in this article.

      Yet there is hope as individuals classed as the “brightest and best” are coming here from southern Europe as highlighted in the link below. What we need to do is fully utilise such resources.

      Whilst we should encourage manufacturing we also need to take every scrap of output elsewhere too as we have strengths in areas like IT that are in the “virtual world” which is growing so fast. Somewhere in there I believe there is hope for us that is diverted into house price booms.

  4. I checked William Hill’s odds on Wednesday, which suggested the Tories would better labour by about 50 seats. If in doubt – bookies odds are more useful than pollsters trying to pin on the donkey’s tail whilst blindfolded.

    I’m glad to see much of the Brown Balls team exiting stage left – their tenure was disastrous for the UK, and would express the hope that the opposition can rethink economic policy and try find a credible plan.

    • Hi ExpatnBG

      The bookies had a much better election than the pollsters didn’t they? I guess we are back to the old saying “put your money where your mouth is”.

      But there are implications in other areas. For example the print media has had a rough run at a time when it has been doing badly anyway. Yet the more modern media such as Twitter found it/themselves wrong-footed too. I am glad I made the decision to stay out of politics!

      Intriguingly the markets mostly ignored the election both in the run-up and yesterday. Whilst some ran headlines of FTSE up 2%+ and if they did a little research Gilt market higher in fact European markets in general were up. Perhaps the only clear mover was the Pound which perhaps saw some “hot money” coming in and made them pay a bit extra for it.

  5. Hi Shaun and thanks for this blog. Comparing the forecasts of the pollsters with those of the OBR Is spot on. Their reputations being damaged for some time reminds me of the ratings agencies.
    The strength of GBP if maintained will as you say damage exports. Rolls Royce report job losses for this reason. A lowering of interest rates seems feasible.
    I know you have said that house prices should have been left to fall to a reasonable level which would have meant they would have been affordable and not inflated which cause buyers problems in due course.
    I am wondering if you think this still could be done now. If not when do you think this should have been carried out and what negative consequences would have resulted.? A topic for another time perhaps

    • Hi Midge

      I do still think that it would have been better if house prices had been kept at more affordable levels. We were in a trap and our establishment choose to put us deeper into it by reducing mortgage rates and starting the same old game.

      Where would we be different now? We would not have seen the housing sector have more inflation which is mis-recorded as growth. We could have put the effort into areas the UK is good at and pushed for trade gains. So probably less growth in the short-term but something more sustainable for the medium-term.

      Could we do it now? Yes but the problem is that it gets ever more painful which is one of the reasons why I think that interest-rate rises are still a long distance away. The chance was back in 2010 as I pointed out on here.

  6. Hi Shaun,

    It’s off topic, in a previous energy/electricity topic, I posted about needing battery storage to make solar power more practical. It kicked off quite a debate. Tesla have announced their intent to supply domestic electricity storage.

    It’s somewhat optimistic – as expected from marketing announcements. Tesla are only providing batteries, to really make this attractive they want to participate in standardised components, where batteries, solar panels and inverter systems can be bought off the shelf from multiple manufacturers and simply plugged together.

      • Thanks for the link. Adding storage to the grid has many advantages including greater resilience and the ability to run big generating assets closer to full capacity. Pricing electricity according to supply & demand will put incentives in place for buying storage & smart usage applications.

        It is hard to predict how this disruptive technology will affect grids – whether off grid solutions become widespread or whether it leads to a smart grid. The UK is at a very high latitude with dismal weather, Southern Europe and Southern US states have much more sunlight – and I’m watching this tech and plan to use it when it’s practical.

  7. I think the London property market is already collapsing particularly at the top end. Heath Hall, one of the finest mansions in London, very recently sold for £25m despite it being on the market for £100m in 2012. Bear in mind that this house is down Billionaires Row and has 2.5 acres of land – practically unheard of in London! I think this is the canary in the coal mine. You know something is seriously wrong when a canny developer like Andreas Panayiotou loses money and lots of it.

    There are other properties still for sale in Hampstead that are less grand with no gardens and in far less desirable locations areas valued at £30m+. None of these have the slightest chance of being sold at their current valuations. In fact, most of these wouldn’t sell if 50% was knocked off their valuations! £20-30m for flats in London…forget it.

    According to a recent FT article, a small boutique estate agent carried out 37 valuations in March 2015 for owners of high-end homes who were thinking of selling up, when their normal level is between 5-6 valuations. Thus, think how many valuations behemoths like Savills and Knight Frank have done in the same time period! It’ll be a lot!

    The situation is probably even worse in Surrey. Absolutely nothing is moving despite significant reductions (30% or more in lots of cases). I’d be very concerned if I was a shareholder and/or director of McMansion house developers such as Octagon, Royalton and Consero.

    The party is over…Russians, Arabs, and even the Chinese are flooding towards the exits. Now that they’re all trying to leave at the same time, they’re essentially creating a bid-less market which will eventually cause prices to collapse dramatically as supply far exceeds demand. This will surely spill over into other areas of the housing market?! I don’t think this will end well at all.

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  9. Shaun, it is apparent that the UK population that keeps revelling in these increasing prices are either
    1. Stupid
    2. About to sell up and retire abroad
    or 3. BTL landlords.

    because nobody else benefits from this and the amount of black money pouring into the luxury London market from around the world really is depressing.

    • Hi Londoner and welcome to my corner of the web.

      Yet it is always presented as good news isn’t it in the mainstream media. What about first time buyers? That concept has gone in quite a bit of London now unless the individual(s) concerned are very fortunate.

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