St George's Day cheer for the Chancellor
Britain’s economic recovery is firmly entrenched. Employment is growing – and it’s not just part-time jobs, it’s full-time jobs too. In fact, the number of people employed in the UK is at a new all-time record high of over 30 million. Since the peak of unemployment, private sector job creation of nearly 2 million has more than offset the 800,000 public sector job losses. Better still, rising job vacancies suggest this momentum in employment growth is set to continue.
The Government’s Help to Buy scheme has increased mortgage availability and boosted housing transactions, which are back above 1 million a year. The long-run average number of transactions is nearer 1.7 million a year, so there is plenty of scope for this trend to accelerate too.
After six years of declining real incomes, inflation is falling away so that we should see real incomes start to rise this year. Increased personal tax allowances are growing both take-home pay levels and cash available for discretionary spending. As employment continues to grow, so eventually a tighter labour market will see some welcome growth in wages.
Despite the strength of sterling, manufacturing is growing, as well as consumption, services and construction. Survey after survey are suggesting that companies feel increasingly positive and likely to start increasing investment and capital expenditure. Whilst there are some concerns in developing economies, Britain’s big export markets of Europe and the US are improving.
It is not all rosy though. Employment growth is led by London and the South East, and needs to broaden. Long-term unemployment, at 35% of the total, needs to come down. We also have a serious youth unemployment problem. But the experience of emerging from the early 1990s recession demonstrates that recoveries do spread across the country, and long-term unemployment does fall.
Household sector debt remains higher than desirable. Expressed as a percentage of household income, this ratio has fallen from a peak of over 160% to around 140%, but the reduction appears to have levelled off. Many home-owners remain highly sensitive to any increase in mortgage rates. For this reason alone, I believe it is likely that the Bank of England will be slow to raise interest rates, and extremely gradual when it does so.
Progress on reducing the Government’s budget deficit has been slow and there will be no elimination of this until well into the next parliament. As a result, the public sector debt to GDP ratio continues to rise, albeit more slowly. Further growth in employment is the key to greater progress here. More people in jobs means more people paying tax, National Insurance and VAT through spending – the Government’s three big sources of revenue. And it means fewer people on welfare benefits – when social protection payments are the Government’s biggest item of expenditure.
Meanwhile, the UK stock market is valued around its long-term average. It has to some extent re-rated in anticipation of profits growth that has yet to be fully delivered. No surprise, then, that we are churning around in a trading range of 6200-6800. The market needs further evidence of growth in corporate profits to underpin an assault on the all-time high of just under 7000. Strength in sterling has eroded profits growth for many multinationals, though it remains to be seen how sustained this currency strength will be as we approach the General Election in May 2015 and the uncertainty surrounding the outcome.
But it would be almost impossible for economic growth to be as positive as is likely over the next two years without feeding through to growth in corporate profits. Investors may need to be patient, but it should be worth the wait. Once we exceed the previous stockmarket peak – after fifteen long years – history suggests we will enter a new multi-year bull phase.
Some cheerful thoughts both for George Osborne and for UK equity investors for St George’s Day.
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