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Viewpoint - 19/06/2013

June 2013 Monthly View

Monthly output and survey data suggest the economy is continuing its slow improvement in the second quarter of the year.

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The likelihood is that Q2 GDP output will show an improvement in comparison with Q1.

The latest numbers from all three of the main PMI surveys – services, manufacturing and construction – have moved into positive territory. Consumer and business sentiment is starting to firm up, after a lengthy period of pessimism.

Can improvements be sustained?

The key question is whether these improvements can be turned into a sustained recovery from a lengthy period of economic stagnation? The good news is that the main factors restricting growth: tight credit conditions; high inflation and weak consumer spending; low business investment; and the threat of global financial crisis via the US fiscal cliff, Chinese hard landing or Eurozone disintegration, now look to be on the wane.

Oxford Economics forecast real incomes will continue to grow over the next one to two years and while inflation remains stubbornly above the 2% target (2.7%), it has come down significantly from the peak of over 5% in autumn 2011. Additionally, an improvement in sentiment should reduce household savings ratios, which have been above average over the last 18 months. Otherwise, credit conditions are improving, helped by the funding for lending scheme; improvements in business confidence will lead to greater investment; and the outlook for exports is improving via strong growth in the US, less negative sentiment in the Eurozone and a weaker pound.

In GDP terms, the main drag on the economy now looks to be the government’s spending cuts: these will be equivalent to 1% of annual GDP over the next two years.

The property market: a two-paced recovery

Monthly data from IPD shows that the rate of decline in all property capital values has slowed to its lowest level since September 2012. This indicates that some of the gradual improvements in the economy are feeding through into the property markets. However, the economic recovery remains two-paced, with London and the South East performing better than the rest of the UK and this is reflected in relative property market performance. Therefore, we do not expect a straight forward recovery in the property markets through the rest of the year.

Banks continue to retreat from the market

The latest property lending figures show that, not surprisingly, banks are continuing to retreat from the market. As such, net lending to commercial property was negative for the seventh quarter in a row at Q1 2013. This is putting a stop to development activity in most parts of the country, especially where the risks to the occupier market are greatest.

Central London office developments at a four year high

However, in Central London, the numbers show that office development levels are at their highest for four years. Of the c.10m sq ft of space currently under construction, approximately one third is let, with the remaining two thirds being developed speculatively. As a forward looking indicator, the increase in space under construction shows developers and those financing them are feeling bullish about the prospects for Central London offices over the next 18-24 months, although current take-up levels are still relatively muted.


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