Scales of prudence

This month would seem to be an analysts dream - a general election has been called. This has already produced more political comment and economic forecasting than an analyst can shake a stick at.

It is interesting to note the monthly meetings of the Bank of England monetary policy committee are held over two days. The first day is for hearing the latest economic data and forecasts and the second to debate all prevailing issues. From reading the most recent MPC minutes, it is very clear the economy is not reacting to quantitive easing measures in a previously predicted way.  In fact, it is well recognised models for economic forecasting seldom plot an exact outcome. This, therefore, necessitates constant rebalancing measures to be employed.

Inflation remains the big worry within the economy but for the moment but the UK economy does seem to be gaining strength and not losing it. This is in contrast to the Euro zone.  Looking at Japan, output was estimated to have risen 1.1 per cent in the fourth quarter of 2009. GDP in America was judged to have risen by 1.4 per cent in the same quarter.

In the UK, the average consumer has undoubtedly adjusted to the changing economic times - the good news would seem to be consumers are still spending and inflation has increased but has not surged, particularly whilst global resource demand has picked up from its base.

Oil prices have moved markedly upwards since the start of the year and there is a prediction of yet more rises to come. The price of oil might well be a due to a drop in world oil production but it is more likely demand has risen sharply in relation to supply, simply providing proof manufacturing industries across the developed and developing world are increasing output.

Given there has been a nominal depreciation of Sterling since the peak in the summer of 2007 of over 25 per cent, you might expect exporters to now be having a field day. However, the very economies they have traditionally sold to have been belt tightening and competitiveness remains extremely strong with businesses vying for market share in almost all market sectors.

In the UK consumer price inflation was up at the start of the year (3.5 per cent in Jan), no doubt due in part to oil prices and the VAT increase, not forgetting the depreciation of sterling. In fact, equity prices rose by some 5 per cent in the UK during March. There was little recorded change in the Euro zone or America.

UK residential property prices had gone through a period of growth running up to the end of last year but there was a marked change in the early part of 2010. This was no doubt due to seasonal fluctuations as much as anything else. It is thought that householders have in general a lesser need to re-balance their outgoings versus income, as that situation for many has stabilised. There are a vast number of mortgages requiring re-negotiation in the next few months but the climate in which householders will be re-negotiating terms will be far healthier in terms of the availability of mortgage funding and longer term mortgage rate predictions. Swap rates, the rates at which Banks lend between themselves, have been falling recently, especially for long-term money. This suggests a prediction by the markets of a continuing low interest rate environment for some time to come.

In the same way as the MPC carry out their monthly analysis, we can see the ‘scales of economic prudence’ are still very finely balanced.  Certainly, developers are now bringing forward their schemes in ever greater numbers. The opportunity to move home is getting easier from a supply perspective and there is greater option with regards to raising finance. This does not mean the majority of would-be purchasers are going to display a greater propensity to spend, as job security is still a key issue and such matters are directly linked to there being an ongoing recovery within the economy.

Justin Sumner is director – new homes at consultancy GL Hearn

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