Last week we received confirmation that the UK economy had reached what most commentators are calling the ‘Goldilocks’ stage, with growth is neither too hot or too cold. With a fifth consecutive quarter of growth and an annualised rate of 3.1% it’s expected that the country will finally return to 2008 levels of output in the second quarter of 2014. With inflation falling and unemployment also declining there is some cause for celebration, although with output still not growing there is some economic justification for the continued lack of any increase in wages — a measure that is likely to have more impact on the man on the street.
Consumer confidence in the absence of rising salaries is rocketing, with the highest monthly figures since early 2007. This confidence is beautifully bought to life in the automotive sector with the recent March plate change fuelling the highest number of car registrations since 2004. Consumers are willing to spend again and with the continuation of the 0.5% base rate of interest the opportunity is there to borrow cheaply.
Linked to these levels and the improved confidence is the rocketing value of property. Much has been made of the ‘heat’ in the housing market with the OECD even throwing its weight behind the notion that the market needs cooling, and with London properties seeing a near 16% annual increase in house prices there is much to be said on the subject especially with the continued push around Help to Buy scheme. However, due to recent more stringent checks on affordability, there is a feeling that there may be a natural decline in demand. It’s worth noting that Markit PMIs for construction show a continuation of the recent growth with house building still at historically high levels.
At a disposable income level the year-on-year growth trends that we have seen since Q3 2013 have continued and while the absolute level of disposable income has not deviated dramatically in recent months this year-on-year growth seems to be reflected in the continued positive movement in people’s view of the next 12 months. However it’s worth keeping an eye on this measure for the next few months as this will give us an idea of the ‘normal’ reading post-recession and whether people’s confidence has changed in the medium term.
Reviewing the engine of growth, it’s easy to see the importance of services as a driver with a fairly consistent pattern emerging. Combining this with data from Markit/CIPS UK Services PMI suggests that the economy isn’t running out of steam and that we can expect growth throughout 2015.
We’re getting into interesting territory for the Bank of England at the moment, the economy is settled in a growth pattern that looks fairly consistent during four quarters. Who would want to change a settled position when the economy looks set to return to pre-recession levels of output?
Monetary policy is, however, a long term and pre-emptive tool and with continued growth in the housing market and increasing confidence across consumers and businesses leading to increased spending and investment, a delicate balance must be achieved to not upset the market. Q1 or Q2 2015 is being talked about as the likely time for rate increases but I believe Q4 may be a prudent time to notch up interest rates by even if it’s just by 0.25%. It’s likely that this will have a dampening effect on the economy, especially amongst consumers who have had five years of ultra low rates but a significant step in the new year could cause a lot of problems for households managing the traditional post-Christmas debt mountain. Brands can and should be dialling up spends to take advantage of consumer positivity, especially in the area of larger purchases where cheap debt and competitive pricing is still available.
James Hankins is Head of Integrated Planning at Vizeum UK