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Michael Baxter

Bull and bear: UK sees strongest growth in 15 years

Written by: Michael Baxter on September 4th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include:  UK sees strongest growth in 15 years. UK forecast to lead the G7 recovery. The global house price story. The world’s most competitive countries: risers and fallers

UK sees strongest growth in 15 years

Today’s bull and bear comes with one of those stop presses, or breaking news stories. But see this story in the context of the second item below and you can see that there is more evidence to back the bulls, not to mention the interest rate hawks.

Markit put it like this: “The economy is enjoying its strongest growth spurt for over 15 years, according to PMI survey data, benefitting from a triple-whammy of faster growth across the manufacturing, services and construction sectors.”

This morning saw the release of the Purchasing Managers’ Index (PMI) for services. Yesterday the PMI for construction hit its highest level since 2007. Monday saw the PMI for manufacturing – with new orders at their highest level since 1994. This morning’s Business Activity Index for services rose to 60.5 for August, the highest reading in six and half years. The survey also pointed to the biggest rise in backlogs since 2000.

Put the three reports together and what do you get?

Well, this is how Markit put it: “The UK all-sector PMI hit a new survey high for the second month running in August, having risen from the previous record of 59.5 in July to 60.7. Both July and August readings have been the highest since data for the three surveys were first available in January 1998.”

The surveys suggested the UK economy’s growth in Q3 will be at least 1.0 per cent and possibly as much as 1.3 per cent.

Now let’s hand over to a bullish forecast from the OECD.

UK forecast to lead the G7 recovery

A couple of years ago, Goldman Sachs forecast robust recovery for the UK economy in 2012. In fact, it predicted that the UK would enjoy the highest growth rate in the G7. Let us not dwell on that any longer; it just worth bearing in mind that even vampire squid get it wrong.

Now the OECD has published its forecasts for Q3 and Q4 of this year. Predicting the economy seems even more unreliable than predicting the weather. But one assumes that the closer we get to the period we are forecasting, the more accurate our predictions become. As an aside, in one respect the climatologists do seem to be more accurate than economists. At least we can say with a fair degree of certainty what the weather was like after the event. As you will know from the way in which the ONS revises its data on GDP, economists cannot even predict the past very accurately.

The OECD has forecast that the UK economy will expand at an annualised rate of 3.7 per cent in Q3 compared to Q2. Across the G7, only Canada is expected to do better. An annualised growth rate of 2.5 per cent is forecast for the US and 1.3 per cent for the three largest euro countries.

Bear in mind, by the way, that the PMIs referred to above point to quarterly growth of as much as 1.3 per cent. On an annualised basis this is much higher than the level forecast by the OECD.

As for Q4, the OECD has the UK growing faster even than Canada – predicting annualised growth of 3.2 per cent, and 2.5 per cent for Canada, 2.7 for the US and 1.4 per cent for the Euro’s three largest economies.




Moving away from the OECD and its forecasts, here is something that really did happen – unambiguously. The pound rose against the euro yesterday. At the time of writing, there are 1.1822 euros to the pound, making the pound the most expensive it has been relative to the euro for three months.

It is a funny thing how forecasts are often revised downwards when an economy is deteriorating and then revised upwards when it is in recovery mode.  And it feels as if forecasts for UK plc are being revised upwards virtually every day.

This is good news, of course. Let’s hope it lasts.

But the implications for interest rates are on the hawkish side. It was told here yesterday how the Shadow Monetary Policy Committee, which meets under the auspices of the Institute of Economic Affairs, voted for a hike in interest rates See: Shadow MPC votes for rate hike 

Last week Mark Carney tried to persuade the markets that they were being too optimistic and that rates are unlikely to rise until 2016.  You can see why many are not convinced.

The global house price story

Mark Carney must be pleased to see the UK and Canada top the OECD growth forecast for the G7.

But there is something else the UK and Canada have in common, and that is a property market that looks bubble-like – or in the case of the UK, it looks like it may become bubble-like; in the case of Canada, the bubble may be close to bursting.

In its latest report out this morning, the OECD took a look at house prices across its member countries and compared the current ratio of prices to income and rent, with the average for each respective country.

This chart tells the full story:


And for those of you who don’t have microscopic vision, (you can always enlarge the image) house prices appear to be most overvalued in Belgium, Norway, Canada and New Zealand. Looking at price to rent, house price in these four countries appear to be more than 60 per cent overvalued.

Still looking at price to rent, we then get the next tier: France, Australia, Sweden, the UK and Finland, where overvaluation is in the region of 30 to 40 per cent.

The data may provide good(ish) news for Holland and Denmark. In these two countries, house debt to disposable income is very high, but so too are assets to disposable income. The fact that house prices in these two countries is above average (about 10 per cent overvalued looking at price to rent), but not excessively so it is a point to the bulls.

Then again, the OECD looked at countries where house prices appear overvalued and are falling. It said: “This category…includes many European countries where the post-crisis housing market correction is still ongoing, most notably Spain, but also the United Kingdom, Belgium, Denmark, Finland, the Netherlands and one non-European country, Australia.”

Not quite sure how the UK ended up on this list, house prices may be overvalued, but they are not falling. And in the case of Denmark and Holland as said above, prices may be falling but the extent of the overvaluation appears to be modest.

The world’s most competitive countries: risers and fallers

The World Economic Forum has just published its latest league table of the world’s most competitive countries. There are no surprises at the very top: Switzerland, Singapore and Finland are one, two and three respectively – the same as they were last year.

Germany is up two places at number four, the US up two at number five, Sweden down two at six, Hong Kong up two at seven, the Netherlands down three at eight, Japan up one at nine, and the UK down two at ten.

But these competitive charts do provide a pretty good idea of an economy’s underlying strengths. France is at 23, Italy 49, Spain 35.

As for the BRICS, China is unchanged at 29th, Brazil 56, India 60 and Russia 64.

A good guide to growth potential may relate to a country’s standings in this chart relative to its GDP per capita. Competitiveness is not a perfect guide to the economic potential. Some countries are wealthy even though they are not seen as competitive. Luxembourg, Macau and Qatar have the highest GDP per capita, but they are not so competitive – Luxembourg is at 22nd spot, Qatar at 13th.

In terms of GDP per capita China is in 92nd spot. Indonesia is in 116th spot, and the Philippines 122nd

Yet Indonesia is at 38th spot for competitiveness. The Philippines is a country that many see as having great growth prospect, but its showing in this chart is not so impressive; it is in 59th place.

Actually, if you look at South East Asia, you will see positioning in the competitive chart is much higher than for GDP per capita.

But perhaps a better guide to growth prospects still might be the level of improvement in competiveness.

The most marked improvements were in Africa with Lesotho, for example, jumping 14 places, and Algeria and Kenya 10.

In Latin America, Ecuador saw the biggest improvement by going up 15 places – in fact it saw the biggest rise of any country. Then again, it is much easier to rise up the rankings when you are near the bottom.

But of the G20, the country with the best improvement was Indonesia, up 12 places to 38th slot. The Wold Economic Forum said it was “the most improved of the G20 economies since 2006”.

Right now, money is flowing out of South East Asia, currencies are down, and equity values have fallen sharply. But look deeper and the competitive charts may point to the long term trend.


These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: competitiveness UK China Indonesia, OECD forecasts UK economy, uk economic recovery, UkK PMIs august 2013, when will interest rates rise

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