14.01.10 by Rob Gill
Coreco 2010 Predictions
“The main purpose of economic forecasters is to make meteorologists look respectable”.
This quote, very appropriate given the recent weather, has been attributed to several economists over the years, while events surrounding the credit crunch have shown how badly wrong the “experts” can be on everything from debt ratings, growth forecasts and, of course, house prices.
Despite these difficulties we hereby offer our own predictions for 2010 covering house prices, interest rates and the stock market. Whether ultimately correct or not, it’s important to have a view and a logic behind them to understand the risks and opportunities that any economy presents. We will also offer some examples of events which might prompt far more dramatic movements beyond the scope of any reasonable prediction.
House Prices: up 5% in London and South East
We will stick to what we know and only offer a firm prediction in our core market, (although we will offer that the rest of the country will lag behind), and there are several reasons to expect further rises in house prices in 2010.
Firstly, London especially has seen a strong rebound in prices since their low in Q1 2009, and with demand remaining strong this trend is likely to continue into 2010. Secondly, the UK economy is recovering, the disappointing figure for Q3 2009 has already been revised upwards to a near flat level of -0.2% and it seems a near certainty that the recession did end in Q4.
Finally, virtually every Western government and central bank has every incentive to encourage inflation, being as every school boy economist knows the cheapest way of eroding debt. And within reason, global markets have very little choice but to allow a certain amount of inflating our way out of debt. Property is regarded as an “inflation hedge”, as it generally benefits from inflation, making it a popular asset class in times of expected rising prices.
Interest Rates: Base Rate at 2% by end of 2010
Although the Monetary Policy Committee, (MPC), will wish to keep interest rates low to give as much support as possible to en economy emerging from the worst recession since records began, their hand is likely to be forced by a global economy which is recovering at a faster pace. As in 2007, commodity prices have risen strongly in recent months, and this will filter through to inflation.
Although many commentators expect this inflation to be a temporary blip in the early part of 2010, it has remained stubbornly high throughout the recession and it seems unlikely it will suddenly drop on the return of growth.
The MPC might also be forced to raise rates to offer some defence to the £. Sterling has already devalued some 20-30% against major currencies in the last 2 years, and although this is currently helping us out of recession by aiding exports, any further fall could prove highly inflationary and damage confidence in the UK economy. Other major economies are already out of recession, Australia have now raised rates twice in recent months and others will no doubt follow suit, including the UK.
Stock Market: FTSE 100 to reach 5,950 in 2010
The FTSE has followed other global stock markets with an extraordinary rise since the nadir in March 2009. What started as a “relief rally”, i.e. recovering from levels reflecting very real concerns that the global banking system would collapse, gathered pace with the global economic recovery, and there’s every reason to suggest this will continue in 2010.
Although the projected performance on the UK economy in 2010 would not, on the face of it, appear to justify a 10% rise in our blue chip stock market, the key to the FTSE is really the performance of the global economy. Major stock markets tend to move in tandem with each other rather than their individual country’s economies, while the FTSE itself is largely made up of companies which trade internationally.
As such the FTSE will ride the coat tails of a strong, global recovery and hold just short of the physiologically important 6,000 level.
The “Unexpected”
For the UK itself, the biggest single issue facing the economy is whether our sovereign debt will be downgraded. A downgrade from the gold standard AAA rating would immediately make borrowing for the UK government more expensive, which given our potential borrowing requirements could prove disastrous and lead to a damaging downward spiral which can only be broken with the help of the IMF.
Borrowing rates for individuals and businesses would also increase dramatically and bring the economic recovery to a shuddering halt. This “nightmare” scenario would blow any predictions on interest rates and house prices out of the water.
There is also the possibility of sovereign debt crises elsewhere, notably Europe. Greece’ problems have been well documented, Ireland are tackling theirs with limited success, Italy’s debt to GDP ratio is over 100% while Spain and their banks are, in many people’s eyes, a powder keg waiting to explode. We’ve already seen Dubai having to be rescued by a wealthy neighbour, and it could fall to Germany and France to offer similar assistance to their Euro partners which will put the Euro under pressure while European banks remain influential in the UK economy.
In summary 2010 will see the start of economic recovery in the UK and the rest of the world which will lead to rises in UK house prices, base rate and stock markets.
Given analyst tendencies to err on the side of caution at the recovery point in economic cycles, these rises will be greater than most commentators expect.
There will inevitably be some surprises, which by definition cannot be foreseen and their effects are often dramatic.
Monty’s Mortgage Blog
19.08.10
Mortgage Lending Up...A Bit
Today saw the release of the latest set of data from the Council Of Mortgage Lenders, (CML) stating that Gross Mortgage Lending rose by 5% in July compared to June, although this is still 3% down from July 2009.
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