Mortgage lending down
There was further evidence of the weakening of demand in the private household sector yesterday, when the Council of Mortgage Lenders’ mortgage statistics showed that loans for house purchase in October were down from September (4% fewer, 6% down by value) and from October 2009 (16% fewer, down 12% by value). Remortgaging was also down from the previous month (9% fewer, down 11% by value) and from 12 months earlier (21% fewer, down 24% by value).
This downturn, with lending at its lowest level for five months, is remarkable because interest rates have not been so low for so long in the memory of any current home buyers (though some other conditions for borrowers have been tightened a little.)
Borrowers are being quite reasonable – their worries are shared by many senior people who are paid to worry about these things. Last week, Tim Drayson, economist at Legal & General Investment Management warned journalists that there is a strong chance UK growth will slow next year. (L&G are one of the stock market’s largest investors.) He forecast that UK growth would slow drastically in response to the cuts and the January 2011 increase in VAT to 20 per cent. He added that, were growth to “falter”, the Bank might respond with further Quantitative Easing.
One thing that is clear at the moment is just how difficult forecasting is: compare L&G’s fairly balanced picture with the more positive view from (for instance) Barclays Capital. Or look at the huge range of the fan charts in the OBR’s latest contribution.
Everyone agrees that – overall – private business is still growing, especially in manufacturing. Obviously government demand will be depressed for the next few years. Everyone also agrees that the household sector is depressed and that the increase in VAT and the cuts will depress it further.
There’s less agreement about the impact of trade on this country’s prospects; exports are up and the volume of trade is near to pre-recession levels – on the other hand, imports are growing even more healthily. So overall economic growth depends on the business sector being healthy enough to make up for deficient demand in the government sector, weak household demand and imports running higher than exports.
A lot depends on how much the cuts will depress private business as well as households, whether exports will hold up while governments across Europe cut back, possible appreciation in the value of Sterling and whether the Bank will feel able to maintain an expansionist monetary policy if inflationary pressures build up.
There are so many uncertainties in all this that it would be a brave man or woman who was dogmatic about what’s going to happen. Even if the economy picks up in line with the OBR’s more optimistic scenario there is a risk of a jobless recovery; and if firms do increase their productivity and continue to adopt globally integrated strategies there is likely to be a lot of labour market churn. There is a danger that, even if new jobs are created, they may well require very different skills from the jobs that are lost – and be located in different parts of the country. This is not the time to be cutting investment in education and training – especially for those at risk of being displaced a new round of restructuring.