It’s Still Brexit Unfortunately

We were told that the UK economy would enter a downward spiral the moment anyone had the temerity to vote for Brexit. The Treasury’s forecasts on this matter have turned out not to be true.

There were further legitimate worries that the fall of sterling arising from the imminence of Brexit would set off an inflationary spiral. We have indeed had inflation, but it’s been entirely proportionate to that fall in sterling – no sign of the spiral.

We’ve also long had concerns about the rise in asset prices – especially housing. These now seem to have stabilised.

Sure, the UK economy isn’t perfect, but we’ve historically high employment levels, historically low unemployment, and strongly rising real wages. Without much inflation. Not perfect but pretty good.

The one remaining concern is Brexit. The uncertainty over whether it will happen and how is still reducing investment and thus further growth. And, the shock of whatever the new trade arrangements are going to be if it does happen is still to come.

Consumer Price Inflation

We’ve the out-turn for UK consumer price inflation:

(UK CPI from ONS)

Or in text:

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 1.7% in August 2019, down from 2.0% in July 2019.

The Consumer Prices Index (CPI) 12-month rate was 1.7% in August 2019, down from 2.1% in July 2019.

These are both a little below Bank of England targets, but not enough to engender any monetary policy action on their behalf.

Producer Price Inflation

We’ve also the PPI numbers:

The headline rate of output inflation for goods leaving the factory gate was 1.6% on the year to August 2019, down from 1.9% in July 2019.

Yes, OK, energy prices had something to do with this but not everything:

The growth rate of prices for materials and fuels used in the manufacturing process was negative 0.8% on the year to August 2019, down from 0.9% in July 2019.

We’re under target overall here as well:

Producer Price Inflation(UK PPI from ONS)

Again, while slightly under target, nothing that’s going to create a change in monetary policy stance.

That’s Not All Though, The UK Economy Has A Problem

One of the ways in which QE has fed through into the UK economy is by vastly increasing the price of housing. This following on from the rises in the previous decade under the more normal low interest rate regime. So, how’s that doing?

For house prices have been the Achilles Heel of increasing living standards:

Average house prices in the UK increased by 0.7% in the year to July 2019, down from 1.4% in June 2019 (Figure 1). This is the lowest annual rate since September 2012, when it was 0.4%. Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

Given the excruciating level of those prices in the SE and London, this is good news. Combined with strongly rising real wages – already mentioned – that raises hopes that some sense of normality can be returned to without a house price crash. Wages grow into them rather than prices falling to wages.

House prices(UK house prices from ONS)

Housing Rental Costs

What a house costs is interesting, but we’d also like to know what it costs to rent one:

Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to August 2019, unchanged since May 2019.

That’s a nominal number. Real wages are rising at 2.5-3.0%. So, rentals are becoming relatively cheaper next to wages. What we’d like to be happening.

UK rental prices(UK rentals from ONS)

What About Housing Purchase Costs?

To complete the set of statistics, we’ve got the costs of actually purchasing a house rather than just the price:

Owner occupiers’ housing costs (OOH) in the UK under the rental equivalence approach have grown by 1.2% in Quarter 2 (Apr to June) 2019 compared with the corresponding quarter of the previous year.

Or:

Owner occupier costs(Owner occupier costs from ONS)

The UK Economy’s Basic Problems

The worries of the past few years have been asset price inflation, low real wage growth, and inflation higher than that wage growth. So, what would we like to see? Moderation of asset prices growth, wage rises greater than inflation – and what have we got? What we would have wished for.

More specifically, we’ve also been worried about imported inflation as a result of sterling’s Brexit-related fall. Plus, obviously, the possibility of the sort of house price crash that happened in the US in 2005/6.

Anything’s possible, but we don’t seem to be getting any of that.

My View

Sure, there are things wrong with the UK economy. Productivity growth, for example. But in terms of what we have been worrying about, we seem to be sailing through those problems.

This leaves Brexit as the one economic variable to worry about. As I’ve said previously, I do think the uncertainty and the effects of that upon investment are now doing more harm than whatever actually does happen to trade arrangements if it does happen. But then, as I’ve said many a time, I’m highly biased on this issue.

The Investor View

That there’s little wrong internally with the UK economy means that Brexit must loom ever larger in any evaluation of investment opportunities. No Brexit means no change in trading arrangements and a substantial rise in the value of the pound. With an equal and opposite fall in the FTSE100. A move to a No-Deal Brexit would likely lead to a further fall in the pound, but perhaps that would quickly be recouped.

But in anything like a reasonable time horizon, the major determinant of the macro-investing universe for the UK is going to be your and the market’s views of Brexit. Will it happen and under what arrangements?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2019-09-20