I’m in Cornwall – and I am very much not alone. Last weekend the news channels were gleefully reporting that there were more people here than in London. Our drive here – admittedly from Edinburgh – took 14 hours. There were 2,500 cars in the car park at Harlyn Bay, a very popular north coast beach on Monday morning; I have never seen so many Land Rover Discoverys in one place.
I spent an hour on the phone before we left Scotland trying to book a dinner reservation. I finally scored a table at a not-quite-on-the-sea place in a south coast village. At 5pm. For an hour. Prices are following demand: a surfing lesson for seven? £380. Coffee and croissant for 3? £21. “Hamptons prices,” gasped an impressed New York friend.
A boat-dealer friend in Cornwall usually has 100 boats for sale on their books. Today, anything listed goes in a day. I suspect my friend of very little – possibly no – exaggeration. Two bedroom flats in our village are on the market for nearly £400,000. I’m old enough to remember when you could buy a house here for the price of a Harlyn Bay surfing lesson.
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Pent-up demand is outstripping supply
My point in telling you about my holidays is simple: I am in the vortex of Britain’s stunning V-shaped recovery. The pent up demand that has been building for the past 16 months has been released directly into its bars and on to its beaches. Hooray.
Move away from anecdotes to data and you see the same thing. Numbers published this week show the purchasing managers’ index (PMI) at 62.9, its highest-ever level, boosted by demand in – you guessed it – services. Official numbers show service businesses increasing prices as they reopen.
Meanwhile, UK house prices rose by 10.9% in the year to May (the average is now £242,832). That’s partly about the stamp-duty holiday, partly about low interest rates, partly about people moving from high-cost areas to low-cost areas where they can bid high, and partly, perhaps mostly, about money.
We’ve all had our minds blown regularly during the pandemic by the volumes of cash our government (and others) have chucked at us to alleviate their lockdown policies. We have, says the OECD, been thrown an “unprecedented protective policy net”.
But even though we have got used to the big numbers, it is still worth a reminder of just how much money we are talking: the National Audit Office currently has the total at £372bn. Some £150bn of that is direct support for businesses and another £50bn direct support to individuals. It all adds up to about 16% of gross domestic product (GDP), says the International Monetary Fund. That’s real money, an extraordinary Keynesian experiment, and the reason why the OECD notes this is “no ordinary recovery”, and forecasts 7.2% GDP growth in the US this year and 5.5% next year.
Keep an eye on inflation
One useful way to understand what’s going on here is to look at the fiscal multiplier, the average percentage increase in national income when government spending rises by 1% of national income. If it is above one, the recovery will be stronger: GDP will increase more than government expenditure, helping minimise any impact on the public finances of higher spending.
The usual problem, however, is that it is normally below one and the opposite happens. Before the 2008-2009 global financial crisis, the consensus was that the multiplier averaged around 0.5, according to the Institute for New Economic Thinking. Had it stayed there, we’d be in some trouble now. However it pretty clearly has not done so.
A variety of studies suggest that when spending is debt-financed, when monetary policy is easy and when there is slack in the economy, you will get a higher multiplier. One recent study suggests that transfers to students in the US from low-income households have a multiplier as high as around 2.4, for example. What is it in Britain now? We won’t know for a while.
In November, the government’s Office for Budget Responsibility (OBR) suggested the multiplier would be no higher than usual as a result of the pandemic. But look at the money that has gone direct to consumers and you quickly get a hint that academic papers written in a few years time will prove the OBR wrong. One clue is the better than expected tax receipts last month.
We may even find that with a higher than usual fiscal multiplier we have not underspent but overspent on ensuring a rapid recovery, even as it has eased the pressures on many disadvantaged people.
This is part of the reason I had to have my supper at 5pm on Wednesday. It’s also why you should be keeping a firm eye on inflation, however “transient” central banks keep telling you it is.
It might feel to me as if UK households have spent every penny they have this week. But we still have “excess savings” built up during the pandemic to the tune of about 8% of UK GDP says Pantheon Economics. Start spending that and a one-hour slot for mediocre pizza bread at 5pm and not enough staff to remember to bring the drinks will begin to look like a distant dream.
How should your portfolio react to this? With some caution. The UK is the cheapest developed market out there by some margin, and there is good reason to be in it at the moment.
It made some sense to pay for stocks with obvious high levels of growth, in tech and so on, when there was little general growth. As the economy recovers (at speed) that’s no longer the case, something that makes the UK stock market’s orientation towards value shares look more interesting than even a few months ago.
Gold (up more than 7% last month) is telling you something too, not least that it is a better store of value during an inflation scare than bitcoin. If you want a UK value-orientated investment trust (you do!) perhaps look to Fidelity Special Values (LSE: FSV), which I own. It has hugely recovered from last year’s lows but is up a mere 8% over three years. As the UK booms this year there should be more to go.
•This article was first published in the Financial Times
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