When it happened in August 2009 I was cynical. Back then the RICS housing market survey moved into positive territory. It is an important indicator. So, back then the runes pointed to recovery, and indeed the hard data confirmed this a few months later, but the sense of relief that the UK was climbing out of recession during that period seemed overdone to me. Now it is happening again, but will it last?
I have always put a great deal of store on the RICS housing market index. RICS, by the way, stands for Royal Institution of Chartered Surveyors. It seems to me that it is not just a good gauge of the UK housing market, but actually a pretty good forward indicator of the UK economy too. This is the index that is produced by asking surveyors if house prices rose or fell in their area during a certain period, and the percentage difference makes up the headline reading. The index only rarely shifts from positive to negative, or vice versa. That is what I like about it. It moved into negative territory in August 2007; by November the index was down to minus 41. In April it was minus 94. At that time, many of the forecasters – the treasury for example, or the National Institute of Economic and Social Research – were not predicting recession. The RICS index suggested otherwise, and we now know which was closest to the truth.
The index went positive in August 2009, and the UK came out of recession a few months later. Then in July 2010 it went negative again, and once again it was a short time before the UK fell back into recession.
The index went positive last month, with a score of plus one. I wasn’t sure what to make of that. Sure, it had gone positive, but by the skin of its teeth. Did the index point to recovery or an economy that was simply flat? This morning the latest index reading was out, and this time it is plus five. A more forward looking reading tracking sales expectations rose to plus 36, which is the highest reading since May 2009.
I would not call this overwhelming evidence. A reading of plus five is still very modest, but it is evidence.
The last PMIs were more encouraging. Overall, the composite index tracking manufacturing, construction and services pointed to the UK expanding at 0.5 per cent in Q2 from 0.3 per cent in Q1. But, as is the case with the RICS report, the forward looking indicators are better. The sub index tracking new exports from the manufacturing sector was also up with reports of higher demand from North America, East Asia, Russia, Germany and France. Another forward indicator, tracking total orders, rose to its strongest level since February 2011. As for construction, around three times as many construction firms (40 per cent) anticipate a rise in output than those that forecast a reduction (13 per cent). A sub index tracking new business growth in the services sector, pointed to the fastest rate of expansion since February 2010.
These are not signs of an economy set to boom. They are simply signs of an economy set to grow from minus to low positive figures. But I am encouraged. The latest trade figures pointed to growing exports outside Europe. We are selling more to the BRICS.
There are problems galore. UK productivity growth is way too low. Probably connected with that, real wages are still falling. The help to buy scheme has stimulated the housing market, and record low interest rates are propping up businesses, but is growth created in this way sustainable? I heard a story yesterday about a British company wanting to expand, but was unable to do because of lack of relevant rental space. The business’s owner suggested he is being held back by other companies, which under different circumstances would be bust by now, but that thanks to low interest rates can survive. So that’s the zombie company argument.
There are similarities between the UK today and Japan of 20 years or so ago. And it does not help that our main export market – the Euro area – is stuck deep in depression.
I fear the idea of stimulating growth via pushing up house prices, when what we really need is more innovation, more entrepreneurs.
Nonetheless, the data is clear, the UK is not only out of recession, but Q2 is likely to be better than Q1. The fact that the UK has achieved this at a time when the euro area is in depression and many parts of the emerging world are seeing growth slow is quite impressive.
But for me the biggest hope derived relates to the US. It is clear that the US economy is in recovery mode. That is good for UK exporters. History tells us that the UK economy tends to follow the US economy.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees