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Features

The Bank of England cheers up

John Redwood, Charles Stanley’s Chief Global Strategist, comments on the Bank of England’s reversal of its previously-gloomy outlook.

by
John Redwood

in Features

06.02.2017

The latest Quarterly Bulletin from the Bank was doubly welcome at Charles Stanley. It was good to read the growth prospects of the UK are looking up. We took a more optimistic line about the outlook for the UK economy in both 2016 and 2017 after the Brexit vote, when the Bank with many other forecasters predicted a substantial hit to the UK growth rate in both years. In their latest Report they confirm that there was no hit to output last year at all. More importantly they now also argue that there will be little change to the growth rate this year in 2017. We now expect other official forecasters and City firms to follow the Bank’s lead and agree. We will maintain our forecasts of 2% growth for 2016 and a little over 2% for 2017, as we have throughout. Gradually the consensus is weaning itself off the idea of an immediate hit to growth, and off the idea of pain deferred until the Article 50 letter to leave the EU is sent.

The outperformance of the consensus forecasts last year was substantial. The UK consumer remained optimistic and demand was buoyant. Whilst those making the forecasts were often pessimistic because they themselves wanted the UK to stay in the EU, many of the older better off consumers were extremely happy about winning the referendum and were in a mood to celebrate. Large companies, who were in favour of Remain by a large margin, were pessimistic in the aftermath of the vote, expecting demand to fall. They told surveys they were gloomy, and said they were putting on hold or cutting their UK investment. As they faced increasing levels of demand and good consumer confidence, they had to change their stance. Short of capacity in many instances, they needed to expand rather than contract their investment. Big ticket purchases of homes and cars remained at good levels. The unhappy property valuers who shared the fashionable worries had to revise their views of property values upwards after claiming they had fallen substantially on the vote. Instead of facing relentless panic selling, many buyers emerged looking for the promised bargains which often did not materialise.

At Charles Stanley we particularly disagreed with the big markdown in housebuilding shares on June24th. We did not expect there to be any decline in volume or margin on new homes as a result of the vote. So it has proved. Houses have remained expensive, and housebuilders have gradually overcome their fears and are building more than before the referendum. The main drivers of good new housing figures are homebuyer confidence about their jobs and prospects, and access to sensibly priced mortgage money. Both conditions continue to be met.

So what could go wrong? We have agreed with the consensus that inflation will pick up a bit, as it is doing. This is not mainly owing to the slide in sterling that began in the summer of 2015. It is more the surge in the oil price in recent months, with some other commodity prices on the rise. There is also some domestic wage inflation as a result of the introduction of the government’s Living wage and generally tighter conditions in the labour market. We do not see real incomes falling this year as some suggest. It is important they do not for the Bank’s latest forecast – and ours – to right. Clearly if more of the fall in the pound came through in shop prices that would be unhelpful. So far intense competition in goods markets, and in the retail sector itself, has kept shop prices under good control.

The Bank’s latest Report is a balanced document. It describes a world where shares should do better than bonds. It implies the next move in UK rates will be up. Now we must watch like hawks to make sure it remains right.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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