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A Vizeum View on the Economy – October 2013

Economically speaking, it’s been a month of real interest, with several key indicators painting a picture of a dysfunctional and split economy.  The Q3 GDP is expected on Friday with the market currently taking the view that growth will be slightly up on Q2 at 0.8%. Extrapolated out this comes to an estimated 2.5% annual rate of growth which is historically comparative – However, the country is still 4% smaller than at the peak in late 2007/early 2008.

 

With all this talk of growth one could be confused into thinking that households are beginning to see a glimmer of light; however recent analysis by ONS shows this to not be the case.  Since the crash in 2007, inflation has consistently been above wage inflation. In simple terms the cost of goods is increasing at a greater rate than the money people are earning i.e. we’re getting relatively poorer.  With earnings growth trending down and recent increases in fuel driving inflation, incomes are going to be increasingly squeezed, additionally, shorter-term disposable income has continued to decline YoY.

At this point it’s worth investigating whether the public perception contradicts this.  The data from a variety of sources suggests that consumers “think” the worst is over, even if their wallet contradicts this. Positive consumer sentiment is growing however there is a quirk with Lloyds contradicting GFK by suggesting that today is likely to be better than the future.  As we shall see, this could be a demonstration of a perceptive and self-aware public when it comes to their finances, an interesting and atypical situation!

 

  

Why could this be the case?  Further to last month’s analysis of the property sector, the market has heated up somewhat with the government bringing forward their ‘right to buy’ scheme.  Prices are continuing to grow as shown by both Halifax and Nationwide data.  London in particular saw a 10% jump in asking prices in a month and with this in mind it is unsurprising that individuals think that they have more money than they really have.

      

Add to this the increasing sense of job security and the positive view of the household situation and arguably what we’re seeing is a false sense of financial security.

       

This is borne out by the climate for the major purchases index which has continued to grow.  All demonstrating that perception rather than reality is what drives the market!

VIZEUM VIEWPOINT

At a macroeconomic level the economy is showing distinct signs of recovery however at a microeconomic level there are contradictions that demonstrate the reality of the capitalist model.  The worry here is that instead of a structural recovery we are seeing a consumer, debt-led recovery, which is not sustainable.  With more confident consumers AND the run up to Christmas combining to create a positive scenario for business sales, the concern is that there will be a significant “bump” in the new year as households realise the precariousness of their actual situation.

 

To download full report, click here: A Vizeum view on the economy Oct 13