FSE 2013: Economic black cloud begins to part
Robert Gardner said the broad-based economic recovery and the package of government stimuli were coming together to ease the burden on households and bolster consumer confidence.
He said: “The last four to five years have seen the economy sit under a black cloud but now we can see encouraging signs that the market has turned a corner – but we should not get carried away.”
Nationwide’s economic data showed that if the financial crisis had not occurred the economy would be 15% bigger than it is today and, even based on a 2.5% growth trajectory, the economy would still be 5% smaller than it should be.
But Gardner said there were plenty of positive factors emerging to boost optimism.
He said rising employment and household spending were being supported by external factors such as expected export growth due to eurozone improvements and the strengthening position of sterling.
And house prices, which had been “flat as a pancake”, have moved up to an average annual growth rate of 5% from 1% over the past three years.
John Malone, executive chairman of PMS, challenged Gardner on whether the country’s wellbeing should be tied up with the rise in house prices.
Gardner acknowledged the relevance of house price rises in the improvement of people’s wellbeing but said it was not the most prominent factor.
He said: “House price inflation is clearly relevant but other factors are more important. I don’t think it is the main driver of what people spend and house price movements are not affecting the amount householders spend to the same degree as they did in the past.”
Factors such as wage growth, rising employment and improved confidence in a sustained recovery were cited as being more relevant.
The house price to earnings ratio was given as another indicator of the improved buoyancy of household balance sheets, which although still remained high at just below 5.5 times earnings, was still a lot lower than it was at the peak of the market in 2007.
Gardner said: “The current house price to earnings ratio indicates borrowers are not overstretched.”
There was uncertainty over expectations of when interest rates would rise. The common expectancy is that the bank base rate will rise late November 2015 but the markets believe this will happen sooner; from late 2014 to early 2015, while policy makers expect the rate to rise from the middle of 2016.
Gardner added that it was important to note that, despite Governor Carney’s forward guidance rule tying a base rate rise with unemployment hitting 7%, this would not be an automatic trigger but an indication that a rate rise would now be considered.