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Economy

Chin up Darling

Written by Bill Siegle at Cluttons
Friday, 12 September 2008
Alas Dear Chancellor – things maybe not be as bad as you say. Following the Chancellors almost apocalyptic, Private Fraseresq – ‘we’re all doomed’ – pronouncement that the economy is in its worst shape for 60 years, it is worth taking a few minutes to consider if things really are as bad as he says. Related Articles World: Cut taxes Conservative tax deal welcomed Business news: Monday morning Redundancy could cost more New Chief Executive at HM Revenue & Customs Firstly, we know that manufacturing has been suffering and consumer confidence is low. Personal and business insolvencies are increasing, with corporate insolvencies up in the second quarter of this year by 15 per cent on the same period last year. Further, house repossessions are a daily occurrence and unemployment is rising. The economy in general has gone into reverse for the first time in 16 years or 63 consecutive quarters of economic growth, while inflation is up, though likely to peak at around 5 per cent, as a result of higher fuel costs and rising prices. So far so bad but lets step back and reconsider for a moment. Personal insolvency has been made far easier and less onerous over the last few years, and the stigma associated with bankruptcy has all but disappeared. Also small businesses fail all the time, not necessarily because of the economy but because of bad ideas and poor management. True house repossessions have increased but nowhere near the proportions of the early nineties and while unemployment is rising it too is along way below the 3 million unemployed of the Thatcher years. While there is no disputing the economy has shrunk, it is still only one quarter that reflects this trend at the moment, not the 3 negative quarters needed to confirm we are in recession. In contrast to the gloom, wage inflation is moderate, if not benign and interest rates remain historically low, and look likely to fall sometime before the end of the year as the oil price tumbles. True Sterling, after the Chancellor’s statement, is in retreat against the Euro and US Dollar, although it was falling before he made his remarks, as currency markets factored in likely falling interest rates. However, in the words of Ricky Gervais alter ego, David Brent, “every cloud….”, so as Sterling falters so our manufacturing exports become more desirable and this should aid manufacturers. In the property market, the hardest sector hit has been residential, whereas the commercial market has faired far better than it has in previous downturns. Irresponsible bank lending in the residential sector has not been replicated in the commercial sector and this to some degree has helped protect the commercial market. Tenant demand for offices particularly in the West End and fringe locations is holding up well with West End vacancy rates still a respectable 3.3 per cent, helped in part by a restricted development pipeline. Even in The City vacancy rates are still a low 4 per cent but look likely to rise with the amount of space currently under offer at a five-year low. While financial redundancies will have an impact on City space the downturn arrived before many new schemes, already in the planning pipeline, began. The flip side to Sterling’s fall is that inward investment becomes less attractive. Overseas investors have been vitally important to the UK property investment market accounting for nearly 40 per cent of all deals so far in 2008. It is too early to say yet what effects Sterling’s decline will have on overseas investor, many of whom no doubt have their own problems, but the 40 per cent transacted so far in 2008 is still well above the eight-year average of 27 per cent. Even if inward investment were to slow, and at the moment German funds still appear active, there is a huge amount of money in the form of pension funds, hedge funds and wealthy individuals, waiting in the wings for the market to hit the bottom. So Mr Darling things may not be as bad as you say.