An Economic Briefing With Roger Bootle - Bootle's talk was wide ranging, referencing the US economic recovery, eurozone progress and prospects for UK growth following several years of austerity.
On Thursday 24 September, we held our annual economic briefing with Roger Bootle at the Dorchester Hotel.
Roger's talk was wide ranging, referencing the US economic recovery, Eurozone progress and prospects for UK growth following several years of austerity.
Please view the presentation slides here.
The key themes raised in his presentation were as follows:
The World Economy & Commodities
Roger Bootle was positive about the world economy and felt that Britain’s economy and its property markets were in a favourable place, although there are on-going downside risks. Bootle dismissed the Chinese crisis as not really a crisis. If you invested in the Chinese stock market a year ago, you wold still be sitting on a nice profit. Also the Chinese stock market and real economy are not tightly linked. Despite moderating growth, Bootle was confident that the Chinese authorities would take the necessary steps to stimulate with a variety of policy tools unavailable to advanced free-market economies.
The biggest force supporting the world economy was falling commodity prices. He described this as a massive transfer of income from commodity producing countries to commodity consuming countries and the positive effects on aggregate demand in the advanced economies is only beginning to be felt. Low prices will be with us for another few years due to expansion of supply. In contrast, emerging market economies would struggle as commodity exports are a major part of their GDP. Another supporting force is the US economy, which is robust and will continue to provide a world growth engine. The Fed should have raised interest rates in September.
The UK Economy
The UK economy also looks robust despite the negative impact of austerity on domestic demand. The national debt to GDP ratio has peaked and will begin to improve. Real wage growth is finally showing signs of sustained growth. Despite the positive story, Bootle saw a few risks. Introduction of the ‘living wage’ could cause unemployment to rise. Far more worrying was the current account balance which is deeply negative due to weak exports. Bootle attributed this to the strength of sterling which he sees as overvalued. There is a risk that a sudden market-led correction in value (devaluation) would lead the Bank of England to raise rates too quickly. House prices also look high.
The US should have raised rates in September, they are likely to begin rising before year end. The UK will raise rates later (Bootle implied in 2016) and more slowly than in the US. It is also likely that US and UK interest rate levels may decouple for a time with US rates forecast above 3% by 2018 and UK rates at half of that level. A differential in bond rates will also open up with the US 10 year bond reaching 3.5% and the UK reaching 3% over the same forecast horizon.
Bootle argued that the large ‘yield gap’ and prospects for rental growth meant the UK property was in a ‘good place’ and that while total returns were not likely to remain in double digits, that returns should be good over the next couple of years. When asked if he felt the same way about Europe, he said he was more concerned in Europe with economic performance and that was likely to hold back business confidence and rental growth. In contrast, the UK was already seeing stronger business confidence and that business investment was beginning to pick up strongly.
Bootle argues that the risks of Brexit were overdone, that the importance of existing trading links with the EU were sufficiently strong that they would be maintained irrespective of whether the UK chose to stay in or leave the EU. Grexit was still a possibility and if you have invested any money in Greece, don’t expect to ever see it again. Grexit would have only a minimal impact on the world economy. Far more worrying is the European migrant crisis which he felt was an existential risk to the UK.
If you have any further questions please contact: Lucy Renshaw
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