Recession Concerns Diminishing

The latest predictions from the Bank of England and the credit rating agency Moody’s both suggest that the risk of a UK economic recession are continuing to fall.

Moody’s, as you might recall, is one of the organisations that downgraded Britain’s credit rating after the EU Referendum and expected the consequent economic uncertainty to usher in a period of prolonged difficulty. Now, however, having had a chance to analyse the country’s performance since the vote, it is predicting greater resilience and a relatively swift return to growth.

Although Moody’s accepts that the Brexit vote will inevitably hurt business and that economic growth will be slower than it would have been had the country elected to remain, it notes several positive factors. Firstly, the stock markets have largely recovered from the referendum shock and many businesses are continuing more or less as normal. Moreover, some firms – most notably exporters – have been greatly assisted by the devalued pound.

The falling value of Sterling will eventually cause the rate of inflation to rise and it will certainly have been an annoyance for millions of British holidaymakers this year but, conversely, the new exchange rate makes British good more competitively priced to overseas buyers. Consequently, it could be good news for many manufacturers and other big ’employment’ sectors such as British tourism, which has undoubtedly seen a big sales boost this summer.

Moody’s also points to the lower base rate recently introduced by the Bank of England’s Monetary Policy Committee and to the Bank’s plans for quantitative easing. These measures, it believes, will further stimulate business ambitions and help to stave off the feared period of negative growth.

As a result, Moody’s is now expecting the economy to grow by a total of 1.5% this year and by 1.2% over the course of 2017. Similarly, a Treasury study of recent economic indicators produced similar conclusions: growth this year of 1.6% and a slightly more pessimistic 0.7% for 2017. Barclays, has raised its 2016 forecast from 1.1% to 1.6%, and Citigroup has raised its own predictions from 1.3% to 1.7%. In any of these cases, the figures represent a slower rate than in recent years – last year, for example, saw growth of 2.2% – but, nevertheless, they would take the UK well clear of the negative figures that many had predicted.

Moreover, this gathering optimism coincides with the lowest level of unemployment since 2005 (now standing at just 4.9%) and, during the summer months, consumer spending has been better than many expected.

The news it not all good, of course, and some economists are still predicting negative growth in 2017. Moody’s notes that “uncertainty around the future of the economy outside the common market will continue to dampen business investment and consumer spending” and suggested that both businesses and consumers would therefore “postpone large spending decisions.” Since house purchases certainly fall into that category, there is a risk that this short term drop in consumer confidence might cause a temporary fall in asking prices.

On 22 August, a Press Association article noted that ” Brexit uncertainty will deal a blow to Britain’s housing market next year.” The article, which appeared in the Daily Mail, stated that: “fresh forecasts from estate agency Countrywide estimate that home price growth across the country will slow to 2.5% this year, contract by 1% in 2017, before finally recovering to 2% in 2018.”

Many housing experts have argued that the continuing excess of demand over supply will always tend to buoy up house prices. Generally, that remains absolutely true but, in the short term, it is possible that Brexit and other economic factors could give rise to a small and temporary drop. However, for investors, such concerns are trivial: gains this year would outweigh a 1% loss next year, and in 2018, prices would once again be in the ascent. Unless personal circumstances must absolutely force a sale in 2017, the usual maxim – that property investment works best as a long term venture – still holds perfectly true.

Economists have long argued that, after a period of rapid growth, house prices should start to develop more in parallel with average earnings. The good news there is that forecasts for earnings look equally positive. According to an article in The Telegraph (21 August), “economists believe earnings will grow by 2.4% and accelerate to 2.5% next year – both figures slightly up on last month’s forecasts.”

In many respects, then, the prospects now for property investors are better than many would have hoped just two months ago. Unemployment remains low, interest rates are lower still and the country’s economic record seems to be providing solid grounds for confidence. Moreover, with housing demand still outstripping supply by a massive margin, the long term future of the private rental sector looks very much assured.