In association with Travelport
Investors may be fretting about the US Federal Reserve’s terminal indecision on matters to do with tapering (as well as the practicalities of a US government shut down).
But in reality these short-term concerns mask a growing sense of cautious optimism in the City.
On a purely technical level, there’s a steady and significant stream of money flowing into stockmarkets, mainly from larger institutions that are quietly selling bonds and buying shares.
That’s good news for the travel sector, largely because as the market gently rises it’ll pull the sector up with it – and that helps improve consumer sentiment.
In fact I’d go so far as to say that the travel sector has three very specific reasons why it should be feeling chipper over the next three to four months – crucial months that will determine the pace of summer 2014 bookings.
The first morsel of good news is that as predicted by this column, the UK economy is surprisingly robust – and likely to get even better in the next few months.
In particular my attention was drawn to the recent headline PMI index for the services sector which was basically unchanged at 60.3 – this closely watched measure looks at the flow of business through the all important services sector.
According to analysts at French bank BNP (whose analysis has been spot on so far): “Future business expectations actually rose on the August figures, to stand at 71.8. Meanwhile, incoming new business rose at close to its August rate, which are at rates close to their 1997 levels.
“Backlogs of work are also rising, which suggests higher new orders should support output growth into the fourth quarter. Employment is also reported as rising in the report, with the index rebounding to a near six-year high”.
The BNP analysts have also broadened out this data across the economy (including manufacturing and construction) and their numbers suggest that the confidence measure is now at “the highest reading of this series since the second quarter of 1997. Back then UK GDP increased by 1.2% on the quarter, and averaged growth of 1.% per quarter over the next year”.
As for consumer sentiment data from the frontline, this suggests that the speed of recovery is picking up.
The latest set of numbers comes from a regular monthly survey for Barclaycard which suggested that consumer spending grew at a rate of 3% in September – above inflation for a sixth month in a row.
In particular restaurants (11.2%), DIY (5.8%) and Clothing (2.4%) all experienced “bumper spend as families increasingly shake off austerity and part more readily with their money”, according to Barclaycard.
The next bit of good news is that this bounce back (massively delayed as it is) has been noticed by foreign investors, and is now feeding through into the FX markets where sterling in particular is looking very strong.
I can’t say I entirely share this rampant optimism about sterling but even I was struck by recent comments from the specialists at the ECU group.
According to their chief investment officer Michael Petley, the UK is “seeing multiple ingredients for a sustainable cyclical uptrend in sterling beginning to fall into place.
“Given the extent to which sterling is undervalued (by some 10% to 17% against the major currencies on almost any econometric model), sterling’s general value against a basket of other currencies is unlikely to depreciate further.
“A mere reversion to the mean points to a fairly significant move – especially against the euro – something which may have important ramifications for UK investors and companies”.
If Petley is right then it’s entirely possible that sterling could consistently push through the 1.20 level against the euro and possibly even streak past $1.65 against the dollar.
If so, that’s great news for UK travellers and will also help dampen down domestic cost push inflation – in turn boosting consumer spending. Stronger sterling is obviously bad news for manufacturers – and inbound UK tourism – but frankly neither are significant enough to worry about.
The last bit of largely good news concerns oil prices – which should be heading downwards at some point late in 2013 or 2014. Yet there’s a key caveat to that forecast by City economists – prices might head higher in the short term.
Analysts at Swiss bank UBS summed up consensus view well over the next 12 months – in the short term problems in Libya and with OPEC supplies (or lack of) could push oil much higher but eventually oil prices will fall sharply to as little as $92 a barrel.
Underscoring this weak pricing environment for oil are a series of global estimates for demand for oil by the likes of OPEC and the International Energy Authority (the IEA).
According to UBS analysts most of the international agencies are predicting mild growth in demand for oil in 2013 and 2014, with the most “optimistic at 1.1 mb/d growth for 2013 and 1.2 mb/d for 2014. The IEA estimates 2014 demand growth at 1.1 mb/d, rising from 0.9 mb/d in 2013”.
The key driver though for lower oil prices is likely to be rapid growth in oil supplies from non-OPEC countries – according to UBS these agencies all “raised forecasts for non-OPEC supply growth for 2013, to 1.6 mb/d, 1.2 mb/d and 1.1 mb/d respectively.
EIA expects North America alone to contribute 1.4 mb/d this year and 1.1 mb/d next year [courtesy of US shale production] The IEA is now the most optimistic for 2014 growth prospects at 1.6 mb/d while EIA has cut its 2014 growth to 1.5 mb/d”.
All that extra oil on the international markets will eventually correct any shortages from OPEC countries – provided of course no-one attacks Syria or Iran.