A Prediction for 2018

23rd January 2018

This is my attempt at a prediction for 2018 and convention would have it normally published in late December rather than a month later but reading the runes for the next year has been difficult. I have held back to see how two contradictory trends from 2017 have developed. The first of these has been a fall in business lending, after what could be called a seismic fall in August the contraction continued, with one exception for the remainder of the year. In contrast secured lending saw a relatively quiet first half to the year but was then supercharged in the third quarter.

One can now see these trends continuing on into the new year, but which is going to be more important for the economy is another question. In the short term that collapse in business lending has probably accounted for many of the retailer's poor performance at Christmas (I am expecting a 1% contraction in GDP for last quarter of 2017).Whereas the recent increase in secured lending will probably lead to a return in growth in the first quarter of 2018, notwithstanding any ill effect from the Carillion collapse. Further ahead it is less clear, the bankers return to lending on the property market is a massive vote of confidence and in the past this has become a self-full feeling prophesy or virtuous circle; increased lending leading to increased interest payments that in turn are lent to buy property that in turn pushes prices up and whilst prices are rising lenders have a level of security that they will get their money back. However when prices stagnate as they have done in 2017 there is the possibility that they may fall causing lenders to hold back and is what appears to have happened in 2017. The bank data can be read as lending being held back in the early months but once a fall failed to materialise lenders resumed with a vengeance. Such that it made up for the earlier months plus some. While there is this resilience in property prices and banks are willing to lend we can expect the economy to grow however the stagnation and resilience is not even. A number of regions including London are seeing prices fall. When looking at the detail of the data those price falls in London are focused on the outer boroughs rather than luxury property in the centre. This is in contrast to a buoyant South-East. From such figures it is difficult to draw any single narrative except most of the pressure for prices to raise is outside London. Normally when London falls behind on property inflation it would indicate that the bubble is about to burst. But we can't take anything for granted in this low interest environment.

When one looks at the amount of interested generated money that leads to growth in this country a healthy property markets is by far more important form of lending. As we have seen in the last few years it has powered the economy when other sectors have been subdued. It has also changed the underlining structure of the economy illustrated by a common media theme throughout 2017. The decline of 'things'; where consumers are spending more on 'experiences' than in the shops. Whilst there may have been change in priorities I suspect this trend has been more of a consequence of the housing market than a change in attitudes. The outcome of rising rents and house prices has been to move spending power from the renter and home buyer to the landlord and house seller. Generally the former are young and need physical things whereas the latter are older and generally set up for life. Thus those who have need to spend in shop have less to money, and those who have less need to visit shops can spend more on experiences. In one sense this transfer of wealth has no effect on GDP or its growth provided lending on property continues to increase. If however lending falls or renters cannot afford the rent then this economic model is in trouble. Returning to those two trends of buoyant secured lending and declining business lending, property seems to be a sure bet but it is not totally detached from the real world.

The fall in business lending and the resulting poor Christmas retail figures may be indicative of trouble. It has been my opinion that we are close to a tipping point. I was expecting a house price collapse last year but with raised concerns about disparity between wages and inflation the crisis may well manifest itself in rent or mortgage arrears. Either way one will lead to the other followed by a recession. Climbing out of this recession will be made worse as a result of the restructuring of the economy from the move to provide more leisure experiences than essentials.

On a political note the growing economy resulting from continuous house price rises given a feel good factor that has in turn reinforced confidence in the property. But that feel good factor has also masked some of the structural problems within the economy, the cost of housing, weak wage growth. and the economic challenges of zero-hour contracts and the gig economy. As these stories raise up the media agenda, along with the effects of austerity on public services, that confidence may not look misplaced. And then we haven't mentioned the fallout of Brexit.

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