The End Of A Tenure

You might be aware that in 7 weeks time we‘ll have a new Prime Minister.  After ten years at No. 10, Tony Blair is stepping down; only Margaret Thatcher has served a longer continuous term since Lord Liverpool left office in 1827.

They say that a week is a long time in politics but what about 10 years in the markets?  Well, looking back in time, we can compare the key indicators of the UK economy then, with those of now.

Let‘s start with interest rates.  Yesterday the Bank of England (BoE) increased rates for the forth time in twelve months to 5.5%.  Just about the first act of the new Labour Government in May 1997 was to hand over control of the setting of interest rates to the BoE.  At the beginning of May 1997 interest rates stood at 6.0%, but were almost immediately raised to 6.25%.  On this basis then, borrowers are better off.  Given that the largest single debt that most of us will take on is a mortgage, it‘s interesting to note that in quarter 1 of 1997 the average price of a UK house was £68,042 compared to a current average of £192,314 (equivalent to an annual increase of nearly 11%) (Source: HBOS, May 2007).  So although interest rates are on the increase, they are not as high as they were ten years ago.

It is possible that interest rates may have to go up further to counter the threat of inflation.  Just how far remains uncertain, but ten years ago inflation stood at 2.5% with an average since then of 2.7%; currently inflation stands at 4.8% (headline annual Retail Price Index).  This is far closer to the inflation rate for the previous ten years (i.e. up to May 1997) during which inflation averaged an annual rate of 4.5%.

The fact is, the past ten years have presented us with a relatively benign global economic backdrop.  Not everyone has benefited obviously, but the influx of cheap consumer goods from counties like China has helped keep the global economy going.  Economies that have been able to adapt have experienced steady economic growth, despite an equity market sell-off and heightened geo-political risk.  Of course, there have been economic losers (from East German factory workers to call centre staff in Liverpool), but by and large we‘ve had it pretty good over the last ten years; and although politicians may claim responsibility for this, the driving forces behind the global economy have run a little deeper than government policies.

Nobody knows what the next ten years will hold – will we look back and remember the halcyon days when Brent crude was $65.00 a barrel?  Or when unemployment was just 5.5%?  And above all, what will be the average price of a UK home?  £540,000?  Or should that be €785,000?

[Source: BBC Online, HBOS Plc, The Economist, The Telegraph (Online), National Statistics Office - 11 May 2007]