In association with Travelport
The outlook for the UK economy is the subject of sharply conflicting views. City Insider David Stevenson explains why he sides with the optimists
I know we Brits love to dwell on the economic and political challenges facing our cousins across the pond in France, but aren’t we turning ever more French in our holiday habits?
Every year our August breaks turn more and more into something approaching our own version of the Great Gallic shutdown – everyone in business seems to have vanished from the Square Mile and nothing of real import seems to be happening.
But this inactivity doesn’t give the complete picture. In fact, my view is the summer is incredibly useful in reflecting on what might happen in the all-important last quarter of the business year.
If one accepts this view of August as a reflective opportunity, there are some major debates occurring within the world of money and business.
The most important is between those who say we’re about to see a major slowdown in global economic growth and those who think we’re mid way through a ‘growth pause’.
The former argument rests on a slightly irrational fear of low volatility in the financial markets.
I say slightly irrational because, in reality, we should surely be celebrating an economy where stock markets are not shooting up and down in value and interest rates are steady and low – as is inflation, although real wage growth continues to disappoint.
These pessimists believe we’re stuck in a low-growth ‘new normal’ where economies such as the UK and the US will continue to bump up and down on a lower-growth trajectory.
Crucially, these new normalists think stock markets and businesses are deluding themselves if they continue to believe low interest rates will carry on without substantial dislocation at some.
It’s fair to say this group is currently winning the argument among the few investors still staring at their Bloomberg screens over the summer shutdown.
Many worry that corporate profits at the biggest businesses in the US and UK will disappoint in the next two quarters, dragging share prices down.
Ranged against these cautious types is a larger, though less vocal bunch of business leaders, economists and investors who accept we are in a lower-growth environment but one where central bank intervention will continue for much of the rest of this decade.
This more optimistic bunch think we shouldn’t worry too much about the slower growth in recent months, largely because it’s been driven by poor US weather and investors’ slow adjustment to a reality where interest rates might start to increase slowly to 1.5% or 2%.
In this world view, we are pausing but with a pick-up in growth around the corner as China gets its act together later in 2014 and the US charges ahead in 2015.
This latter ‘narrative’ can draw on a list of recent indicators which suggests we may have under-estimated the positive news and markets and national economies really are pausing for breath before they continue their ascent.
Bill McQuaker, a widely respected money manager at fund management group Henderson’s, recently performed the service of listing the positive macro-economic signals in a note for his investors. In the US, these included:
• Data showing the Conference Board’s main macro-economic activity index climbed to 85.2 in June, the strongest reading since January 2008.
• Job openings in the JOLTS survey continued to strengthen. The ratio of vacancies to unemployed workers rose much faster than its post-crisis trend for the second month in a row. There are now 0.47 job vacancies per unemployed person, the highest level since May 2008.
• The SHRM/LINE survey showed employment expectations in manufacturing were the second best on record and services vacancies were at record high.
In the UK, McQuaker pointed to the following numbers:
• Permanent staff availability fell to 28.9 from 34.9, the lowest on record (REC Report on Jobs). The employment component of services rose in June to historic highs (UK PMI survey). Service sector employment recorded its highest-ever figure at 58.8.
• A BCC survey showed corporate profit expectations at close to record highs for the third consecutive quarter.
• Firms upping salary offers for new permanent staff at the fastest rate in 17 years. “Employers seem ready to ‘splash the cash’ in what appears a desperate attempt to lure skilled staff from competitors,” according to KPMG.
• The Consumer Confidence Index moved into positive territory for the first time since March 2005.
• The highest annual increase in UK house prices since May 2010.
• The graduate job market recovered to its pre-recession peak.
• The highest rate of London house-price inflation since 1987 (25.8%).
• Positive construction data, with vacancies created faster than at any time since 1997.
• The manufacturing sector’s domestic sales growth was the highest in a quarter of a century in the three months to June, with optimism about future profits at a record high.
• Car sales in the six months to June rose 10.6% on last year to 1.28 million, the highest half-year sales total since 2005.
I would add three other positive trends. If we look at corporate cash-flows in Europe and the US, balance sheets are strong although debt levels are beginning to rise again.
I would also suggest spending on capital equipment (a major driver of the world economy) is increasing again at long last, helped by the fact that most economists expect wages only to rise slowly and energy prices are now expected to fall back to below $100 a barrel.
But the biggest positive driver for me is that central bank pump-priming will continue – at least until the end of the decade, if not beyond.
All it will take is one major crisis to come along and spook investors . . . and bankers will be turning the monetary taps back on.
They will try to massage the markets to accept higher interest rates along the way – say 2% in the UK by 2016. But the current extensive interventions are here for at least the next 10 or even 20 years.
Tomorrow – what can we expect in the travel sector?