The outlook for the British economy is deteriorating by the day.
House prices look set for further falls. Retailers are having a miserable time. And it’s all down to one thing – inflation.
Wage rises aren’t keeping up with price rises. That’s making life much harder for consumers. With the consumer price index (CPI) still rising at a 4.x% rate in May, life won’t get easier any time soon.
Yet the Bank of England has no plans to tackle inflation. Because as far as it’s concerned, the alternative is worse.
House prices are heading for more falls
Nasty surprises are coming thick and fast for the British economy. The latest survey from the Royal Institution of Chartered Surveyors (Rics) shows that house prices are falling faster than economists had expected.
The number of surveyors reporting a fall in prices rose to 28% in May, compared to 21% in April. Economist had expected the proportion to fall. Surveyors also became more gloomy on the outlook. A net 27% think prices will fall over the next three months, compared with just 18% last month.
The average estate agent is selling just one property a week now, which does make you wonder how they manage to stay in business. “Buyer interest in purchasing property remains flat across much of the country and there is little sign of this changing any time soon,” said Ian Perry of Rics.
Most agents blame tight lending conditions. That seems odd at first. The tracker and two-year fixed rates being advertised by mortgage lenders are at an all-time low, according to Bank of England data. With all that attractive financing on offer, why aren’t buyers tripping over themselves to snap up property?
The answer’s simple. New borrowers aren’t actually getting access to these rates, says Paul Diggle at Capital Economics. When you look at the actual rates that borrowers are paying, compared to the more attractive advertised tracker rates, he says, you have to conclude that lenders are “restricting the number of such loans they actually make, perhaps by setting the credit scoring criteria on these products at a very high level.”
The only market that remained immune to the gloom is the London market, according to Rics. That makes sense for a number of reasons. If you’re a global buyer of property, then London is where you’ll buy. Some of the capital fleeing the Middle East and Europe is bound to end up in London property.
Also, the capital is less dependent on public sector spending than any other area of the country. So it’s not as vulnerable to fears about ‘the cuts’. And there’s just more money in London than other parts of the UK, so there are more people in a position to borrow.
But we wouldn’t like to bet on this continuing. With the global economy showing signs of slowing again, it’ll be interesting to see how long the London market can defy gravity.
Even Tesco isn’t immune to the consumer slump
Meanwhile, it’s not just the housing market that’s under pressure. As my colleague David Stevenson pointed out yesterday, retailers are feeling the squeeze too.
Even the mighty Tesco is having trouble. First quarter sales at Britain’s largest supermarket chain came in worse than the City expected. Same-store sales (excluding petrol sales and VAT) for the three months to May 28th were up 1%. Analysts had expected a 1.5% gain.
And yet, the group gained market share over the same period, according to Kantar Worldpanel. That suggests life is at least as tough for its rival grocers.
The underlying problem here for both the property market and retailers is the same – inflation. Sure, access to credit isn’t great. But the fact is that consumers are also getting poorer in real terms. It’s extremely hard to put aside money for a 25% deposit on a house if your wages are falling.
So why won’t the Bank of England do anything about inflation?
The problem is, if it does raise rates, then it could make things even worse. As Diggle points out, “the increased share of borrowers at variable rates has left the housing market particularly exposed should official interest rates rise any time soon.”
A rise in repossessions would not only send house prices lower, it would hit the banking system hard. Banks have been “extending and pretending” on housing loans, as my colleague Merryn Somerset Webb notes in her latest column. They’re not just doing that out of the goodness of their hearts.
So what does all this add up to? Regardless of how fair or otherwise the Bank’s policy is, it clearly has no plans to raise rates unless inflation spreads to wage settlements. So that’s the first thing you have to keep an eye on (you can do that here http:/www.moneyweek.com/inflation).
But if the Bank doesn’t raise rates, we can expect inflation to remain high. Particularly as sterling may weaken further if the economic picture deteriorates. In other words, this slow grinding down of the average consumer’s standard of living will continue. It’s called ‘stagflation’ and it’s not very pleasant.
As we’ve noted before, that means you need to do your best to make your money generate a ‘real’ return for you. You should get your allowance of National Savings & Investment certificates if you haven’t already. Our panel of experts also looked at ways to protect your wealth in our latest Roundtable. If you’re a subscriber you can read it here: Twelve investments to put in your portfolio.
Our recommended article for today
Why you should dump your bank shares now
Britain’s banks are dangerous things. They have unsustainable levels of bad loans, and are entirely opaque businesses that prudent investors couldn’t possibly hope to understand. If you own bank shares, you should dump them now, says Merryn Somerset Webb.