My favourite indicator of the UK economy if flashing insipid red, a mild improvement from last month suggests that the threat of a UK recession has reduced. Even so, there are some worrying developments out there. Strap yourself in, the next two years will be difficult.
If you are a regular reader you will know how I rate the monthly Residential Market Survey from The Royal Institution of Chartered Surveyors. Not only does this provide just about the most reliable bellwether of the UK housing market, but because, in Britain, the consumer is so important to the economy, and because rising house prices typically buoy the consumer, it is a pretty good forward indicator of the UK economy.
The bad news is that the index which relates to what house prices did in May (by taking the percentage difference in the number of surveyors who said they fell from those who said they rose) remained in negative territory. Following a downgrade of data for February, that means the index has been negative for three of the last four months, and on the one occasion when it was not negative, it was zero.
The good news is that the index did pick‐up a tad, from minus eight in April to minus three in May. The bad news is that the last time the index saw a period of negative readings was between July 2010 and November 2012, when the economy really did seem dire. On the other hand, back in October 2010, the index fell to less than minus 40. Sure, the RICS index is negative at the moment, but compared to previous periods when it was less than zero, things don’t seem so drastic.
The index seems to be saying that both the housing market and the economy are weak, but a long way from recession.
Buy buy buy‐to‐let?
The RICS index did contain some interesting data on new housing instructions. The index measuring this rose sharply, from minus seven to plus five. Some are speculating that the changing tax treatment of buy‐to‐let, meaning the ability to off‐set interest against revenue is diminishing, is leading to a sell‐off amongst landlords. If that is right, then we could be at the beginning of seeing a major shift in the UK housing market, with a glut of buy‐to‐let properties being put up for sale. This could have significant negative repercussions for house prices.
Some sectors are contracting
UK construction saw yet another contraction in April – according to data out last week. UK construction is now into its third quarter of contraction, meaning it is in recession. Manufacturing has now contracted every month for three months – it’s not in recession yet, but unless it sees a sharp improvement, it is heading that way.
Recent data did contain some promise, retail sales surged by 1.3 per cent in May, and year on year, retail sales were up 3.9 per cent. This is good news indeed. Can the consumer help stimulate the economy at a time when construction and manufacturing are struggling? Real wages are rising at last, but only by the smallest of margins. UK inflation was 2.4 per cent in both April and May, wages with bonuses rose 2.5 per cent in April.
But I have a deeper concern. Growth in the money supply is slowing. The Bank of England’s preferred measure ‘M4 excluding intermediate other financial corporations’ expanded by 3.3 per cent in April, the lowest rate of expansion since 2014. This factor alone may be enough to cause the Bank of England to stay its hand on the interest rate button for a good while yet. The consensus is that rates will not rise this month, but an August hike is likely. I am beginning to think that even this is unlikely. If the slowdown in money supply growth continues, then rates may not rise at all this year.
For equities, what happens with the economy matters – but there are time lags. Three years ago, the indicators pointed to the good times returning to the economy and sure enough, UK stock markets hit records, but with a time lag between economic indicators pointing to strong growth, and record highs for stocks.
Now the indicators are pointing the other way.
But what happens in the US is important. Economic theory says that the Trump fiscal stimulus at a time when the US economy is seeing strong growth is the precise opposite of what should happen. And sure enough, US inflation jumped to 2.8 per cent in April. The Fed is sounding more and more hawkish. It increased interest rates to two per cent on June 12th. With US inflation seemingly on the up, the Fed may yet be forced to increase rates to a much higher level than is being forecast. Capital Economics has forecast US rates peaking at three per cent next year. If the Trump fiscal stimulus forces rates to rise even higher than that, then the knock‐on effects could be dire.
But the danger of a trade war provides the real reason to worry. I was appalled by the vitriol from President Trump and his advisors aimed at the Canadian Prime Minister recently. I was horrified by comments by White House trade adviser Peter Navarro that “there is a special place in hell" for Justin Trudeau. Although, Mr Navarro has since apologised, I think that the US administration speaks with a false tongue on this one. In fact, while Canada has a trade surplus with the US in goods, overall, including services, Canada has a deficit. It is just the Trump demographic are more concerned with manufacturing. The real problem, though, is the US tax system. The US economy benefits from trade with Canada, but rather than using some of the profits from this trade to support those who lose out, Trump would rather bang the protectionist drum.
The ultimate danger in protectionism is war. Countries that are interdependent on each other are less likely to declare war on each other. I fear for the long run consequences of protectionism.
In the medium term, though, it will be the global economy and stock markets that are the victims.
But the Trump rhetoric is outrageous. If I was a G7 leader, or the president of China, I would be spitting feathers right now, and would be calling for strong retaliation.
Trump’s protectionist agenda is a threat to us all.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.