Action not words

The new government now has an immediate and pressing task. They will need to outline their plans for bringing the UK’s public spending deficit under control with immediate effect.

There are many ways to do this but the markets will be eager for decisive action. Some liken the current financial position of the UK to that of Greece. This might be a little farfetched, however, a strong and stable government is a prerequisite, as far as the markets are concerned.

So what are some of the burning issues now facing the incoming administration?

Inflation

The consumer price inflation index currently lies around 3 per cent as opposed to a government target of 2 per cent. The former chancellor, in an open letter to the governor of the Bank of England, under section 12 of the Bank of England Act, put forward the case that CPI inflation will fall back to previously agreed target levels over the remainder of 2010. This analysis was accepted in the round.

Quantitative easing

Former government ministers have always maintained the view that a ‘double dip’ recession might occur if quantitative easing measures are scaled back/abandoned too soon. The public sector borrowing requirement is sure to have been high on the first cabinet’s agenda. There is no doubting the markets lie on a knife edge and could swing either way subject to a wrong move or statement from the incoming administration.

Jobs

Companies over the last two years have been wedded to finding cost reductions as profits dried up or came under pressure. This has created a good deal of unease in the jobs market. It has also slowed the housing market, given fears of job insecurity. The scales of economic prudence are therefore weighted in more than two directions at any time.

The Euro zone

Greece, Portugal and Spain are all deemed to be in precarious financial positions. Greece has been assisted by a monetary package arranged by the IMF, Germany and the European and World Banks. Loan guarantees totalling some €720 billion (£625 billion) have been put in place. This amounts to some €440 billion of bilateral loans from the Euro zone members; €220 billion by the IMF; and €60 billion by EU members via expansion of their balance of payments.  Germany has been congratulated on the world stage on a decisive and bold move. They alone have contributed some €123 billion towards this initiative to safeguard the Euro zone currency. This move was said to have come about despite strong internal government opposition and it being in contradiction to current German fiscal policy.

How will the housing market now react to recent events? Build starts across the south east are probably at their highest for two years or more. Property price inflation in the south east has been said to have reached double digits in key locations and yet in certain areas of the UK there is barely positive price growth.  Swap rates (the inter-bank lending rates) for short/long term money have generally fallen for the second month in a row.

A general feeling now exists that interest rates will be kept low, in the short term at least. This, combined with projected increased levels of liquidity in the finance markets, will undoubtedly increase turnover in the build industry. The banking system has made significant inroads into repairing individual banks balance sheets and this should now mean they can free up more loan finance, so as to help ‘oil the cogs of the economy’. A strong and stable government will do no harm in facilitating such actions.

Justin Sumner is director – new homes at consultancy GL Hearn

Have your say

You must sign in to make a comment