So where is the bad news?


As I write this article Team GB are second in the Olympic Medal table with 41 medals under our belt, including 16 golds. The weather is sunny & warm and the stockmarket is up!

We thought the savage mark downs in the prices of many UK shares following the UK referendum were unwarranted. We also thought the gloom was overdone, with many forecasters and commentators expecting sharp declines in property values, a fall in retail sales and general output, and a possible shallow recession. We said at the time that the pessimism about property and housebuilding was too intense, and the UK economy was likely to grow in 2017.

In the immediate aftermath of the vote, the pessimistic case was built by various commentators and the media drawing on a series of opinion surveys from companies and others suggesting that consumer confidence had fallen a lot, that investment would be held up or cancelled and the property market would contract badly. The so called Purchasing Managers Survey, often compiled from the responses of senior executives in large companies, was poor. Many surveyors recommended marking property down. Some open ended property funds closed, perversely refusing not only to pay out investors who wished to sell but also preventing new investors from buying.

Now we are six weeks on from the vote we are at last getting some real figures of what has happened in the weeks immediately following the decision. It is altogether more reassuring than the surveys of what might happen. Retail sales in July were up by the biggest amount since January. The weather helped, with good food sales for BBQs and more summer clothing rushing off the webpages. Growth was most pronounced in discretionary areas like eating and drinking out, the very areas you would expect to be squeezed in a recession. The second quarter figures for economic growth were good despite the uncertainties people worried about during the long referendum debate.

The RICS report last week is also more measured than many of the early property comments after the vote. This is still mainly a survey about the future, but it shows that some of the gloom is lifting. Their members now expect prices to carry on rising for UK residential property over the next year and over longer time periods. They also expect transactions volume to pick up a bit. It fell sharply in April when the new higher Stamp Duties came in, designed to reduce Buy to Let purchases. Their summary concludes “A large portion of respondents note, after an initial wobble, activity has returned to normal, whilst others fell Brexit has only had a very modest or negligible impact”. They expect higher residential prices over the next year though the summer lull could be a little weaker. Their main worry is the shortage of supply of both new and second hand houses. This is not a problem which normally leads to a price collapse.

Commercial property too is trading more successfully than the negative forecasts suggested. There have been several large transactions at good prices post vote, and some good rental agreements signed in Central London where the fears have been highest of some falls in both rent and capital value.

The Bank of England took action at the end of this period to offer additional stimulus. They revised their forecasts, and now expect the UK to grow by 2% this year, 0.8% in 2017 and 1.8% in 2018. We think their 2017 figure is too low. The money supply was growing satisfactorily prior to their latest measures. These should have some impact on increasing the rate of growth in money and credit extended. This is all compatible with a continuation of recent growth around the 2% mark.

So what could go wrong? The Bank’s large money creation programme has weakened the pound. We have already experienced a substantial devaluation and would not wish to see a further large fall in the currency. The ultra-low bond yields the Bank is determined to achieve are undermining the stated positon of some company pension schemes, where the deficits rise if the interest rate falls. This could act as a deterrent to more company investment as some companies consider how much extra cash they need to invest through the pension plan rather than in the company itself.

We will watch these risks. Overall we still conclude that the UK should avoid recession and will show reasonable growth next year. The bond market is at very high levels but is underpinned by more substantial Bank of England buying to come. Shares will also benefit, as investors think of switching money out of gilts into riskier assets.

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