2ndth January 2015

A Prediction for 2015

No change

It is that time of the year for making predictions but before I do you may want see how well I got 2014 here and here. You may disagree but I think I called it fairly well. I missed the increase of growth due to consumer borrowing but there again that is emotional response form the population that is always difficult to forecast.

So what of 2015? As always one of the principal drivers is the level of interest rates which in turn influence the amount of money in the real economy and inflation. With interest rates expected to remain low we are unlikely to see any real changes in the UK economy fundamentals of low growth, low inflation and stagnant wages. As the consumer spending has been propelling much of growth the principal driver will remain on lending in the housing sector. Not so much to do with London as prices here stagnate but as the rest of the country catches up from both locals and London emigrates flush from selling their London properties. As mortgage affordability continues to fall so we can expect lending to fall with the subsequent knock on effect on GDP. However should interest rates start to rise around the world due to the recovery in the US we may see the Bank of England forced to respond. Though a US rate rise cannot be assumed due to the fallout in the way in which much of the gas and oil fracking industry has been funded.

Elsewhere there has been some excitement regarding a halving in the price of oil, this by itself is unlikely to impact on this prediction for the UK. Whilst cheap oil is traditionally linked with growth it also requires a growing money supply which will not happen while interest rates are low. Secondly the economic conditions are such that most UK companies will take any windfall as profits and consumers will use it to reduce their indebtedness. It is likely that the only country to truly benefit from lower oil prices is China which may in turn benefit exporters to this economy.

It is also unlikely that the General Election in the spring will make much difference. Regardless of the colour of the winning party they are unlikely move away from the current low interest rate policy.

However there is trend that has been developing over the last few years that could significantly change the outlook and that is Britain's continuing asset sell off to pay for our current account deficit. This was epitomised by the aggressive takeover attempt by Pfizer for AstraZeneca. But equally interesting was the takeover of Pizza Express that only made it to the business pages. In normal times there is nothing particularly unusual about these takeovers especially when the UK is running a current account deficit but as already said these are part of a long term trend. What is stricking is that these two companies represent how far the envelope has reached. For AstraZeneca this is the amount of funds the very large predators can draw on. Pizza Express represents the lower limit which despite its Asian growth potential is relative small fry. It indicates how low in the barrel foreign investors are having to go to find 'investments'. What else remains? We are starting to approach the owner operated companies whose acquisition may be hard to integrate into a larger organisations or prove unprofitable without the input of the original owners.The other aspect of the Great British asset sell off is the London Property market but this has been cooling off in the last few months removing one of the remaining drivers for growth.For all the talk of rebalancing the economy it appears to be getting worst with announcement that the current account deficit represents 6% of GDP for the third quarter of 2014. In other times a current account deficit this large would have seriously upset the market and led to a significant devaluation of the pound. That it will happen is a given as we have not addressed the underlying problems of consuming more than we produce but when is more difficult to predict and will depend external events and London's reputation as a safe haven. Those who are seeking a safe haven have invested in property but with no intention of either living there or seeking tenants giving them a high level of liquidity. It is worth remembering that a lot of properties were purchased when prices were going up and the pound had a higher exchange value. This in itself most probably created a virtuous circle of high property prices leading to a strong pound that in turn that drew more property buyers in. With so much hot money the process could be reversed by the smallest of events leading to a meltdown in prices and fall in the value of the pound. One trigger could be the rouble crisis where there is a reduction in the number of Russian buyers. Alternatively investors may seek other safe havens that the deliver a better return such as the US. In normal times we could have expected any of the events leading to the pound being devalued and rising interest rates but these are not normal times and the increasing turmoil in the world will probably keep much of the hot money in the UK that will in turn hold the pound up. Even if there was a gradual decline in the pound's value the continuing poor performance of other economies may lead to world interest rate remaining low. Thus a year of low growth, low inflation and stagnant wages remains highly probable.

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