By Michael Baxter 23 Dec 2009 [5 Comments | 3,680 views]
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Well, this may not seem like realism to you, but yesterday saw a raging torrent of information pointing to a humdinger of a recovery in 2010.
According to the Royal Institution of Chartered Surveyors (RICS), house prices are set to rise next year by between 1 and 2 per cent. The volume of monthly sales is likely to rise from 50,000 to 70,000 (which is approaching the kind of levels seen before the credit crunch) and the poor old, beleaguered, first time buyer will be stuck living with parents, renting or borrowing from the Bank of Mum and Dad.
The view from RICS is not shared by many, including, for example, Capital Economics which expects to see sharp house price falls next year.
The real driver of UK house prices has surely got nothing to do with fundamentals, and is based on an unrequited love. The Brits fell in love with the property market around 40 years ago when inflation was rocketing, real interest rates were negative, tax relief on mortgage lending was available and the UK was in the midst of seeing the home ownership level soar. All these factors pushed up house prices. Inflation gave home ownership a lustre. Today, the drivers that created that sparkle are gone. But love is blind. Our libido, when it comes to home ownership, is as strong as ever. We don’t notice that our lover cheats. That it fools us, and lies to us.
House prices may well go up next year, but we would still question whether they are sustainable at current levels. For first time buyers the spectre of rising house prices is a nightmare. And yet in an economy based on credit and confidence, we need house prices to rise.
The real problem is that we are too reliant on smoke and mirrors to drive growth.
But here is a hard dose of reality, but a dose which is good.
The latest data from the ONS on the UK’s trade saw a sharp improvement in the UK balance of payments deficit. Capital Economics reckons we are on course for seeing the smallest annual deficit for 2009 as a proportion on GDP since 1998. The Telegraph quoted David Owen, an economist at Jefferies, as predicting the UK current account should be positive within 18 months.
As ever, however, things are complicated. Capital Economics pointed out that the main driver for the improving current account was income from UK investments abroad. Even so, it’s a trend in the right direction. It will take time before the cheap pound helps lift UK exporters, but it will.
Meanwhile, in the US there’s talk the dollar might be making a comeback. Uncle Sam himself could be the new comeback kid.
As you know, there are those who think the US is heading for disaster. That is why gold has been rising so high. This column has questioned this pessimistic prognosis, arguing that the single most important of all economic indicators, productivity per unit of labour, is soaring in the US.
The fact is, the dollar has risen 5 per cent this month. The FT referred to a growing body of opinion which reckons the US economy is heading towards strong growth. There have even been hints the Fed is preparing to start reversing some of its monetary easing, meaning the flow of money out of the US should go into reverse. Meanwhile, fears over sovereign debt in Europe have led many investors to seek safety in the warm embrace of Uncle Sam
Another piece of good news was also revealed by the FT. It quoted some data from Standard and Poor’s rating agency suggesting the number of US companies in serious risk of failing has fallen quite rapidly. Back in April there were 300 companies on the S&P naughty list, also defined as companies with junk bonds and credit rating of B-. The latest news suggests the number has fallen to 226.
Maybe, with US productivity rising so fast we shouldn’t be surprised. The US is responding to the recession by working harder and working smarter.
The challenge for the US lies with maintaining the productivity advances while reducing unemployment simultaneously.
And then there’s China.
The economy behind the Great Wall is set to see productivity rise by 14 per cent per person next year. According to the Chinese Academy of Social Sciences the average Chinese will produce $4,000 worth of stuff by the end of next year, compared to just $3,500 odd at the end of 2009.
And now it is time for your Christmas quiz. Pens out please. Be quiet at the back. Here is your question.
If the average Chinese worker produces 14 per cent more goods and services, what must the growth rate be in order to avoid a rise in unemployment?
Who said 14 per cent? Well if you did you are right, more or less. The reality is of course complicated.
Here is another point. If total Chinese production rises by 14 per cent, then consumption must rise by 14 per cent too, or else China will be exporting more than she imports.
And we will end on a positive come negative note.
Surging productivity is good. Globally productivity is rising. Technology must be helping.
But if productivity is rising so fast, there is a real challenge ensuring demand keeps pace with potential supply.
If you really want to know what caused the economic crisis of 2008/09 we would argue that the underlying factor was simply that global demand was not keeping pace with supply. All the other stuff, bankers’ greed etcetera were just symptoms of a deeper trend.
And that’s the New Year message. We may have become too successful. There is so much doom in the press, and while there are reasons to worry, the biggest thing to fret over is the press coverage of doom itself.
We must not lose sight of the remarkable rises in productivity, of the effect that technology is bringing.
And by the way, watch genetics science over 2010, and prepare for announcements that will stun the world.
The real danger today is that we get so preoccupied with fiscal deficits, and quantitative easing, that we suck all this remarkable potential out of the system.
Michael,
A fabulous set of articles today. Thank you, this is much better than anything I have read elsewhere.
I say, go skiing (in Bulgaria of course) and forget the crunch.
Happy Christmas
Lance
I love it when you give the good and the bad and highlight the truth of both. Thanks. And Merry Christmas.
Michael
Great article …..is the market right and 6 months ahead of the game? Who knows….. certainly not the economists so what chance have I got!!…..but your piece neatly lays out the quandry.
Here’s something I’ve been pondering over for some time now: to what extent can today’s problems be traced back to the al-Qaida attacks at the beginning of the decade? ie without these attacks, the central bankers would not have reduced interest rates to such low levels, and held them them there for so long. This then led to the carry trade and asset bubbles of the second half of the decade. Which eventually led to the credit crunch.
I’d be interested in peoples’ views.
PS A Merry Christmas and peace, joy & prosperity to all during the coming year
PPS Great to see the newsletter back.
PPPS Any chance of having a print option again so that I can again read it in the bath?!
With reference to Nigel Turner’s comment above
I think the effect of 9/11 is understated. Alan Greenspan slashed interest rates, arguably fuelling the boom and over exuberance that followed. It was like that in 1987/88 too, when governments around the world reacted to the ’87 stock market crash by boosting demand. In the UK we then saw the Lawson Boom, and then we saw nasty recession.
Manipulating the economy in the wake of a disaster is notoriously difficult. It has been compared to having a shower in a hotel with a hot water system you are not used to. The shower is too cold, so you turn up the hot water, not realising that the shower was getting hotter anyway, and suddenly scolding water pours forth, engendering a string of expletives.
But there are other events which may have had an even bigger impact upon the economy.
These days we talk about the economic boom that preceded the credit crunch – a boom which lasted 16 years in the UK – as being based on an illusion. There is some truth in this, but only some. Another factor that stood behind the boom was a substantial increase in productivity which was driven by new technology. Another, incredibly important but often forgotten, factor was the end of the Cold War. The end of the rivalry between the US and Soviet Union, which had taken the world to the brink of nuclear war, had hugely significant economic implications which are often overlooked.
Another important development was the dotcom crash and the wider stock market crash which followed it.
It is arguable that the natural point for a global recession was the end of the 1990s. It was thanks to the policies of Alan Greenspan, and perhaps to an extent Gordon Brown, that helped enable us to avoid this fate. The US suffered a mild recession Germany flitted in and out of recession, but much of the world, with the UK in the vanguard, barely paused for breath.
Working out cause and effect is complicated.
Critics of Gordon Brown say he should have fixed the roof when the sun was shinning, but who is to say the sun would have been shining if he had pursued more prudent policies.
Then again, it is debatable whether deliberate manipulation of the economic cycle is a good thing. Gordon Brown vowed to end boom and bust. Clearly he failed. But even if he had been successful, it is debatable whether these aims were desirable. Bust can be a good thing.