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67: Investor UK Economic Update


Interesting times. The US dollar has recently declined, inflationary pressures have built, with some tentative signs the US economy is slowing from the heady rate of 4% GDP per annum. Pressure on US interest rates has spooked the markets and there has been a flight from high risk stocks. Meanwhile, the commodities price hikes have come well off their peaks - with gold coming down, oil declining from $75/bbl to $68/bbl and metals generally coming down.

For the UK property investor, this is good news in that UK sterling is holding up well against the Euro and advancing against he Dollar - which should reduce inflationary pressures, and decrease pressure to hike interest rates. Meanwhile, UK Sterling assets should retain their values. The oil price decline from $75 to $68/bbl also helps ease inflationary pressures and the decline in the dollar also helps. So despite concerns about inflation rising to say 2.4% CPI by year end, now believe inflation - if the dollar declines further and oil stays below $70/bbl will stay beneath 2.2% - thereby meaning the BoE will not need to increase interest rates. This would support further more sustained house price increases in the south of England and London, and likely stagnating in northern area (except for -for example- low priced regenerating areas like Sheffield, Bradford and parts of Liverpool and Manchester areas).

Manufacturing is continuing to be hit hard by higher commodities prices along with competition from countries with cheap labour - expect this to worsen - this affects the Midlands and northern areas particularly.

The declines in the stock markets may lead to a slow down in the services sector in the SE/London - and ease existing house price increases.

So the steer is - keep a keen eye on the US dollar and the oil price - if both decline, this should support low interest rates and further house price stability and growth.

A big decline in the UK Sterling against both US Dollar and Euro, plus increase in oil price above $75/bbl are both big risks - and could precipitate a house price correction in all areas - through an increase of inflation to 2.4%+ and thence an increase in interest rates to 5%+. The key is that the BoE have target to keep inflation at or close to 2% - so they are obliged to increase rates if inflation reaches levels of say 2.4%, even if unemployment is increasing and GDP is slowing. A logical objective dispassionate banking approach to economic management!     



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