Economic recovery? Bricks and motors build the evidence

Upturns in the housing market and car industry provide longer-term proof and momentum for City optimism

Is this for real? The City certainly thinks the economy is finally emerging from the long, dark tunnel of stagnation into the sunlight of strong growth. That’s why sterling and the interest rates on government gilts were up on Thursday. A recent run of strong data has convinced the financial markets that this time there will be no setback.

Houses and cars provided the latest evidence of recovery. That’s significant because buying a home and buying a car represent the two big-ticket items of consumer spending. If the lipstick index is the barometer of the little treats people give themselves when times are bad, then the number of people putting their foot on the property ladder is a good guide to an economy starting to gather momentum.

So it is of some significance that the report from LSL property services showed that the number of first-time buyers was up by 45% between July 2012 and July 2013. The figure was the highest for any month since November 2007, when the financial crisis was still in its infancy.

The monthly sales report from the Society of Motor Manufacturers and Traders told a similar story. Indeed, the strength of new car sales by private buyers has been evident for the past 18 months and was one of the few positive signs during the flat-lining of the economy during 2012.

True, there may have been some special factors involved. There is some evidence that consumers have been using their compensation from miss-sold protection payment insurance as the deposits for a new car. Higher petrol prices have created incentives to trade in gas guzzlers for more fuel-efficient models. Motorists have been wooed by some smart promotions by dealers.

All that said, though, the year-on-year rates of growth reported by the SMMT are still impressively strong. Private car sales were almost 15% higher in August 2013 than they were a year earlier, and in the first eight months of 2013 they were up by more than 16%.

The data for first-time buyers and car sales reinforced the impression provided by the three surveys of manufacturing, construction and services from the CIPS/Markit earlier in the week. But snapshots of business confidence are one thing; people actually committing themselves to 25-year home loans and finance agreements quite another.

In the City, there was plenty of interest in how the Bank of England would respond to this batch of upbeat news. After the July meeting of Threadneedle Street’s monetary policy committee, the first chaired by Mark Carney, the Bank issued a statement in which it sought to bring a halt to the upward drift in market interest rates which it fears could, if left unchecked, threaten the recovery.

Two months of strong data and a further increase in market interest rates later, however, there was radio silence from the Bank. No suggestion that the markets were getting ahead of themselves. No attempt to talk down rates. No suggestion that Threadneedle Street had a plan up its sleeve that would reverse the upward trend in gilt yields.

“This is quite a bizarre strategy by the Bank,” said Nick Parsons, head of strategy at National Australia Bank. “If it issues a statement when it is not happy with the level of rates, the absence of a statement implies they are happy with the level of rates.”

The lack of a statement did indeed lead to interest rates on 10-year gilts edging towards 3% and the pound rising against the dollar and the euro. It is hard to believe, however, that the Bank is happy with this state of affairs. It still believes that a premature tightening of policy could choke off nascent growth. But with the City paying more heed to evidence of an incipient housing boom than to Carney’s forward guidance, it is at a loss as to what to do next. © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

Link to article:

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload the CAPTCHA.