The Real Economic Forecast Post Election?

This outlook comes courtesy of JSA Consultancy Services and is written by Roger Martin Fagg. It refers generally to a forecast done for the office furniture sector but it is an interesting view on the economy and industry in general. It is worth a read just to get back a perspective outside the political electioneering cycle.

Colin Watson

The Economic Outlook

There has been a hiccup in our strong recovery due to election jitters. This has affected the spending by Government departments and some private sector investment decisions. However, it has not reduced the confidence of consumers at all. Retail sales are now growing in volume terms at the pre 2008 rate. These are being paid for by a reduction in the savings rate to just above zero, an increase in net credit of £3Bn, and a rise in real wages.

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In addition the oil price is still boosting discretionary incomes, as is the strength of sterling against the Euro. Outside central London, strong house price growth is fuelling the wealth effect (as is record share prices).

The overall picture is one of an economy which is back on trend growth, with the key indicators showing all is well. Yes, there is still the large budget deficit, but this will begin to decline quite quickly over the next year or so. The balance of payments is the only indicator flashing amber. And this can be interpreted in a number of ways. The first is strong demand for imports is the consequence of strong domestic demand. The second is the income we normally get from overseas has fallen sharply which suggests the rest of the world is not performing that well.

The pre-election rhetoric is hugely misleading; austerity (such as it was) is over. If it is the economy stupid, then the Conservatives deserve a majority, and the LibDems much more credit. But the campaigns do not even mention the big strategic issues Government will have to have a view on: the impact of automation, the internet of things (smart machines interconnected and making their own decisions), creative innovation, the public sector pension liability, climate change, UK infrastructure (in particular the relevance of HS2), and most importantly our approach to Europe and the case for staying in, but reforming from the inside out.

The biggest risk to growth in the next six months is political. A hung Parliament with the SNP holding the balance of power will have significant detrimental effects on the investment decision (the consumer will not pay much attention).

Over the past 5 years we have attempted to forecast the UK Furniture Market. Broader economic conditions have been such that all the traditional forecasting models have been badly erroneous. Our track record is consistent with every other forecaster (pretty poor!)

However we can say that from now on, some of the more normal patterns we see in an advanced economy will return. We should expect at least six years of solid growth, even if Greece leaves the Euro (80% chance) or defaults on its debt (90% chance). JSA Consultancy Services + Roger Martin-Fagg April 2015

Yes there are global risks. China, the Middle East and Mr Putin. But the UK is back, our banks are fixed and desperate to lend. Real wages will grow by at least 2% over the next few years, and real growth will be around 2.8%.

Expect interest rates to move up a year from now, but in small increments, topping out at 2.5% in three years’ time. The exchange rate should sit around 1.34 Euro, 1.50 Dollar.

We haven’t had it so good for seven years.

Roger is a graduate of the University of Leicester. He has worked in the New Zealand Treasury, at the Bank of England and, for many years, was Client Director at Henley Management College where he worked with a wide range of businesses. He is a behavioural economist who believes that economic forecasting is an art, not a science and that it is crucial to estimate the nature, size and impact of ‘animal spirits’ when looking forwards. He believes that Government cannot control the economy; it can only influence the behaviour of economic agents. He was one of the few who forecast the depth of the recent recession based on his anticipation of the behaviour of the banking system. He thinks it is better to be broadly right than precisely wrong when forecasting the future! JSA Consultancy Services + Roger Martin-Fagg January 2015

http://www.jsacs.com/

 

 

 

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