The Future's Bright, The Future's Brown?
A few eyebrows were raised last December when the Chancellor, Gordon Brown, announced his predictions for economic growth and inflation. During his Pre-Budget Report, Mr. Brown said that he expected inflation, as measured by CPI (Consumer Price Indexation) to come back within the government‘s 2% target by mid-2007 and revised projected economic growth upwards to 3%.
At the time, politics aside, this prediction was very much towards the optimistic end of the spectrum - when compared to the prevailing market view; and, it‘s true to say that it still is, with the consensus appearing to foresee an upwards inflationary threat.
But perhaps, just maybe, Gordon Brown might have reason to feel extra pleased with himself by this June.
So let us fast forward for a moment (and remember, in the words of Peter Snow, “this is just a bit of fun”) to the middle of June 2007. Tony Blair is contemplating his final round of international meetings and Gordon is boxing up his possessions, ready to move next door, having just celebrated 10 years as Chancellor (being the longest serving in nearly 200 years). Economic growth is just north of 3.0% (above that of France and Germany) and inflation is back down to 2.0%, with the prospect of a cut in interest rates on the horizon for July. Outlandish?
Well, you‘ve probably got your own views on Mr. Brown‘s chances of succeeding Tony Blair as Labour Party Leader and Prime Minister, but his economic predictions appear to be more realistic now, than they were in December. Economic growth has been steadily improving since a low in quarter 2 of 2005 and currently stands at 3.0%. The latest Bank of England (BoE) Inflation Report showed a dramatic drop in inflation from 3.0% to 2.7%, reflecting decreasing energy prices and an environment of rising interest rates. If energy prices continue to fall, or even remain stable, inflation could come down even further. Furthermore, the latest inflation report comes too early to reflect the effect of the BoE‘s most recent rate rise (or even the full effect of the one previous).
Naturally there‘s a lot that can happen between now and June (both economically and politically) and a key consideration that we have not mentioned above, is the effect of rising house prices and the potential for above trend wage increases. Nonetheless, if inflation can remain below 3.0% and as close to 2.0% as possible, then we are very unlikely to see hefty increases in interest rates, and with the possible exception of Spain, the UK economy has experienced stronger economic growth than the principle Eurozone economies.
On a separate topic, Minerva‘s noticed that there has been a huge amount of new money being poured into UK commercial property retail funds. The Investment Management Association (IMA) statistics show that the inflow amounted to £3.6bn. All of this comes at a time when managers of UK commercial property funds and asset allocators are dampening down expectations of returns.
The fact that the general public is ploughing money into the commercial property sector now, when professional investors are beginning to take their profits reminds Minerva of the old story about the Wall Street shoe shiner in 1929. For those unfamiliar with the story it revolves around a particularly wealthy businessman - sometimes Joe Kennedy (father of John Fitzgerald Kennedy) and sometimes J. D. Rockefeller - who was disturbed to hear the shoe shine boy on Wall Street dispensing stock tips. So unnerved by this was the businessman that he decided to sell a large part of his stock holdings, on the basis that he did not want to expose his wealth to the whimsical fancy of the everyman. Consequently, he was largely unaffected by the Wall Street Crash, which occurred a week later.
True or not, the moral of the story is that if everyone believes they can make a profit, the best times are probably past and it‘s time to get out.
[This section was compiled using data and information obtained from BBC Online, The Economist and the Investment Management Association].