UK economic data has been perking up.
The pound is surging. Factory output is rising. Companies are feeling more optimistic. And of course, house prices are on the rise.
Is this an epic recovery?
Nope. It’s just the usual British story of boom and bust, all over again, I’m afraid.
And because of the cynical nature of this recovery, when the next bust comes, it’s going to be a cracker…
Forget about saving – the government wants you to spend
One reason Britain was so vulnerable when the global financial crisis hit in 2007 and 2008 was because households were so indebted. The other – related – factor was that house prices were massively overpriced and vulnerable to any tightening of credit availability.
So you might think that one good way to use the time that followed this epoch-defining monetary disaster would have been to reduce our dependence on consumer debt and high house prices.
Not a bit of it. With an election looming in 2015, “the government has lost patience with talk of living within one’s means”, as Trevor Greetham of Fidelity Worldwide Investment puts it in the FT this morning. Instead, looking for a quick fix, the coalition has “unleashed the beast, tempting consumers to leverage their balance sheets into a new housing bubble”.
In the first three months of 2013, households saved 4.2% of their income, according to the Office for National Statistics. That was the worst showing since 2009, when the rate fell to 3.4%.
It’s no surprise really. With the cost of living rising more rapidly than wages, consumers need to dip into savings just to maintain their standard of living. But it doesn’t help that consumers are also being positively encouraged to take on more debt.
As Greetham points out, “a long and chequered history of boom and bust cycles has shown that a strong housing market is a sure-fire way of generating a strong economy, at least for a while”. Rising property prices make people feel wealthier. Rising housing sales mean higher sales for property-related goods – ‘big ticket’ items such as kitchens and bathrooms.
But there’s a price to pay. All of this depends on cheap debt. And debt can’t stay cheap for very much longer.
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Rates must rise eventually
Bank of England governor Mark Carney will resist raising rates before the election with every ounce of power he can muster. In his most recent speech on monetary policy, he warned that if the market continued to price in rising rates, the Bank would look at other ways to bring them down – presumably via more quantitative easing if necessary.
And it’s very hard to see any scenario in which George Osborne is willing to risk raising rates and scaring mortgage-owning voters before the 2015 election.
So between now and then, companies that profit from a housing bubble in particular will probably continue to do well.
The trouble is, this short-term sugar rush will give way to reveal an economy that’s potentially even more vulnerable than when we went into the crisis. “As things stand the consumer is set to come out of the recession with even more debt than it had going into it, storing up trouble for the future”, notes Greetham.
That’s a major problem. Because, like it or not, interest rates will have to rise at some point. As a result, “the economy runs the risk of another house price crash further down the line”.
Bear in mind that the burden of another house price crash would fall directly on the shoulders of the taxpayer: either via the mortgage guarantees that the government has seen fit to dish out, or because we’ll be called upon to stand behind banks’ balance sheets yet again.
And meanwhile, as Carney tries to suppress rates, we’re also likely to see “a sustained rise in inflation to erode the ever-higher consumer debt burden. Neither outcome presents an appealing prospect for investors”.
I look at ways to profit from the UK’s short-term, debt-fuelled recovery – and its long-term problems – in the latest issue of MoneyWeek magazine, out just now. If you’re not already a subscriber, get your first three issues free here.
But if you’re looking to invest in an economy with a more sustainable consumer boom emerging, you should consider Germany. My colleague Matthew Partridge looked at how to profit from Germany’s property boom in a recent issue of MoneyWeek.
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