After looking distinctly grim for the past year or so, UK plc seems to be booming again.
UK stock markets are soaring, recent surveys show house prices heading higher and there are signs of a pick-up in consumer spending.
Even the manufacturing sector has produced good news in recent weeks. The sector grew at its fastest pace in nearly a year during March as exports rose to record levels during the first quarter.
So is the UK economy on the comeback trail? Can we stop fretting and start buying back into retail stocks and buy-to-let property?
Don’t bet on it…
As Robert Cole points out in The Times, the apparent pick-up in the UK economy rests on extremely shaky foundations. “No one should take this upsurge…for granted. Nor should they assume it will persist for any length of time.”
Both Easter and the World Cup have had a skewing effect on recent data. The late timing of Easter is likely to have unduly flattered recent retail sales data. And a decent set of results from Dixons owner DSG International earlier this week was in no small part due to strong sales of flat-screen TVs to ardent England fans.
Demand for said TVs also helped manufacturing data – the solid expansion in March was driven in part by a 1.3% rise in output from the electrical and optical equipment sector.
But long after the England team have returned home from Germany, those flat-screen TVs will be making their presence felt in the form of credit card interest. Just as the brief spending splurge at Christmas lead to a high street hangover in January and February, it seems likely that the lean times will return during the summer once football fever has faded.
As for the housing market, the latest spurt of activity has got the Bank of England worried again. As Governor Mervyn King puts it, house prices “do seem remarkably high.”
That’s something of an understatement. The Council of Mortgage Lenders reckons that total UK mortgage debt will rise above £1 trillion this month.
But with repossessions on the rise and first-time buyer numbers at historic lows, it seems unlikely that this state of affairs can continue.
Cliff D’Arcy on the Motley Fool website points out that “first-time buyers underpin the housing market, because they form the bottom rung of the property ladder…if they are struggling to reach for this first rung…then this will have a knock-on effect all the way up the ladder.” As he puts it: “this bubble will indeed burst one day. The only question is when!”
And of course, now that interest rates are generally acknowledged to be heading higher, the boost delivered by last August’s rate cut could soon be reversed.
One person who is worried about the prospect of higher rates is Gordon Brown. The Chancellor would clearly prefer the squeeze on house prices and the economy to be held off until he has managed to wrestle the post of Prime Minister from Tony Blair’s limpet-like grasp.
So he has again urged public sector staff not to go for large wage hikes this year. The government plans to keep pay rises for hospital consultants, senior civil servants and judges to 1%. Mr Brown has also written to all departments urging “pay discipline” and reminding them of the Bank’s 2% inflation target.
But it’s hard to get people to accept below-inflation pay increases, particularly when the minimum wage is set to rise by 5.9% in October. That puts a lot of pressure on employers to do the same for their other pay grades.
If it’s any comfort, concerns about inflation are not unique to the UK. Edward Hadas on Breakingviews.com points out that “consumer expectations of inflation are increasing in most big economies.” Interest rates look set to head higher across the world.
So it’s not just UK assets you need to be concerned about – the global interest rate tightening cycle will affect every asset class in one way or another. We published a piece from the Fleet Street Letter yesterday, pointing out which investments look vulnerable to continuing interest rate hikes – if you missed it, you can read it here: Why soaring gold means rising interest rates
Turning to the stock markets…
The FTSE 100 ended down 41 points at 6,042. Mining stocks were among the few gainers, with Xstrata top riser, up 3% to £24.80. Retail stalwart Marks & Spencer was the main faller, shedding 3% to 611p on rumours that brokerage Cazenove is looking to sell 40m shares in the group, possibly on the behalf of US investment firm Brandes. For a full market report, see: London market close
Over in continental Europe, the Paris Cac 40 fell 15 points to 5,262, while the German Dax fell 63 to close at 6,054.
Across the Atlantic, US stocks slumped as April retail sales came in far lower than expected, rising just 0.1% excluding petrol prices. But the main worry was the potential impact of soaring commodity prices on inflation, which might encourage the Federal Reserve to keep raising interest rates. The blue-chip Dow Jones dived 141 points to 11,500, while the S&P 500 fell 16 to 1,305. Meanwhile, the tech-heavy Nasdaq fell 48 to 2,272.
In Asian markets this morning, the Nikkei 225 slid 260 points to 16,601 on fears that US interest rates will keep rising. The steadily weakening dollar compounded the pain, with exporters among the main fallers.
This morning, oil eased back in New York, trading at around $72.70 a barrel. Brent crude was also lower, trading at around $72.75.
Meanwhile, spot gold hit its highest level in 26 years, rising to $726 an ounce before easing back to around $718.
And here in the UK, the Competition Commission has cleared the way for HMV to make a fresh bid for bookseller chain Ottakar’s, saying the deal would not hurt consumers.
And our two recommended articles for today…
When’s the best time to buy gold?
– What do Indian brides and Canadian stockbrokers on holiday have in common? They are both partly responsible for seasonal rises and falls in the gold price, according to The Daily Reckoning’s Doug Casey. So should investors wait for the usual summer dip – also known as ‘shopping season’ – before buying gold stocks? Find out by clicking here: When’s the best time to buy gold?
Should you invest in Russian gas?
– Plans to list Russian oil and gas giant Rosneft on the London Stock Exchange have proved highly controversial. But have the risks been over-exaggerated? Jeremy Batstone at Charles Stanley thinks so. To find out why Rosneft and the Russian gas sector in general could provide more opportunities than threats for investors, see: Should you invest in Russian gas?