It looks like the UK economy is streets ahead of everywhere else’s. The International Monetary Fund now expects the UK to record the fastest-growing large developed economy of 2014.
The first estimate of UK growth in the third quarter of 2014 is 0.7 per cent. While that is a bit less than last quarter’s 0.9 per cent, it is still an annual rate of about 3 per cent. That is the fastest annual growth in the UK since 2007, and a great step forward after six years of underperformance.
There are still risks, though, and we should remember that even though the downturn was not as deep as the ONS had first thought, the UK has still been through one of the longest recessions in its history. That cumulative loss of economic output is likely to be larger in total than that lost in the Great Depression of the 1930s. We still have a lot of making up to do.
Domestically the UK is in quite good shape, with a decent balance between consumption and investment, and the Bank of England expecting business investment to continue growing at double digit levels. The latest BoE credit conditions survey shows that the sentiment about lending to business has improved. This reflects greater confidence in a recovery as banks increase their risk appetite and facilitate badly needed investment.
Looking ahead, a sustainable economic recovery depends not just on domestic demand but also that from overseas. This is where the road ahead looks bumpy. The UK’s net trade position has been disappointing as recovery elsewhere in the world has faltered. The eurozone economy is still far from stable, and continuing unrest across the world upsets supply chains as well as confidence. The relative improvement in the sterling exchange rate has not helped either. Indeed, there is strong evidence of a slowdown in manufacturing in the third quarter presenting a threat to the pace at which the UK can continue to recover.
Furthermore there is still the deficit to consider – even if Ed Miliband did forget about it in his recent conference speech. Weaker tax and national insurance receipts means that borrowing has been higher this year than last, meaning that there is still a big job to do. The well-respected and independent Institute of Fiscal Studies estimates that less than half of the deficit reduction required has happened so far. So, there is more austerity ahead, despite the tone of the party political conference speeches.
All this has led to something of a change in sentiment over the pace of the economic recovery, hence the likelihood of early interest rate rises. Indeed the BoE’s chief economist, Andy Haldane, has admitted to being gloomier now than he had been three months earlier. He put his change of mood down to the mark-down in global growth, heightened geo-political and financial risks, and the weak pipeline of inflationary pressures from wages internally and commodity prices externally. The implication was that interest rates could remain low for longer than he had expected.
That sentiment has fed into the financial markets, resulting in falling swap rates, which in turn are feeding through into lower mortgage rates. That is good news for the housing market, which has begun to be a bit fragile of late.
Housing transactions have been waning over the last few months, and the latest mortgage approvals data suggests there may be more of that in store. Not all of this can be put down to the changes in mortgage market regulation. There has been a clear change in market sentiment, as approvals tend to lead the count of actual transactions and the latest trend is certainly down.
However, the Bank’s latest credit conditions survey shows that banks and building societies are now more minded to lend than hitherto. This seems to be backed up by the slide in quoted mortgage rates. Indeed, over the past few weeks there seems to be something of a price war emerging as lenders compete for business. That certainly chimes with the survey results which report that lenders are intent on chasing market share objectives now that economic conditions – and their balance sheets – are a bit healthier than they were. The fact that the bank rate looks set to remain low for some time to come and swap rates have dropped should help to keep mortgage rates low.
Competition for lending is not at the expense of the quality, nor is it with the expectation that house prices will continue to grow quickly, according to the survey. That should bode well for something of a resurgence in mortgage approvals in the coming months.
However, the Bank’s study also shows there is a clear perception among lenders that demand is waning. Mortgage rate reductions can only go some way towards changing this, but the growing resistance to higher house prices is having an effect – the latest survey of house prices from Nationwide shows the first monthly fall in house prices since 2012, and data from RICS shows that surveyors believe that house prices in London are now falling. A rebalancing of the London housing market is certainly welcome, but it may mean a few leaner months before healthy activity is restored.
Fionnuala Earley is residential research director of Hamptons International
Key points
* The UK has just enjoyed the fastest annual growth in its economy since 2007.
* There is a change in sentiment over the pace of the economic recovery, and hence the likelihood of early interest rate rises.
* Banks and building societies are now more minded to lend than hitherto.
