Double bubble or double dip?

The governments of Europe and the western world seem to have been successful in averting a banking catastrophe, via their use of quantitive easing measures and the lowering of interest rates. In fact, their quantitive easing measures have been so successful in stimulating growth in their respective economies, they are now facing an even greater challenge – impending inflation.

There is no doubting national housing statistics, in that house prices have been rising again.

In some areas it is suggested they are back to their 2008 peak values. The question therefore has to be asked, ‘why has this happened at a time of diminishing disposable incomes’?

The main answer is to do with low interest rates and cheap finance for those with good levels of equity in their homes. There is also the fact that the pound has weakened against a raft of world currencies and this makes the politically safe and stable UK, a preferred place to invest.

Talk at all recent party conferences has been the need for an impending adjustment to quantitive easing measures, so as to pre-empt the risk of inflation and a ‘double dip’.

Now that the path to recovery has been set, governments from around the world know they now have to slacken their inflationary monetary policy measures, thereby curbing government expenditure and bringing down government debt, (in the case of most Euro zone countries, this was accrued during times of quantitive easing).

VAT is set to rise from its current 15 per cent rate before the year end. Some suggest this might even go up as high as 20 per cent. Taxes either direct or indirect are set to rise. Unemployment may not have bottomed out and may yet take some considerable time to do so. Also, the UK economy is likely to suffer a drop in its GDP by around 4.25 per cent in 2009; this constitutes a challenging time ahead but not an impossible one.

Overseas trade, due to the cheap pound, would seem one place for UK exporters to now take advantage. However, the Euro Zone/America will not be rushing to spend their Euros/Dollars over the coming year; Far Eastern markets will therefore be their target. The Base Rate is likely to be used as an inflation busting tool, (base rate currently 0.5 per cent), but this will surely weaken the housing sector, especially when increasing lending rates start to take effect.

So where are we heading? It is an almost impossible to answer question at this time. Western governments all know and understand the challenge ahead and it does not matter from what side of the political spectrum you come from, the task remains the same – we must aim for a double bubble and not a double dip. Economic prudence is therefore called for.

Justin Sumner is director, new homes, at consultancy GL Hearn

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