The Bank of England last week announced measures that would check the housing market in future if household indebtedness rises towards levels that would threaten financial stability. We’re not there now. So, the Bank’s actions are best viewed as a combination of an insurance policy against future risks and an incentive for lenders and borrowers not to go there.
A loose fitting cap. The Financial Policy Committee made what it called a pre-emptive move, by placing new restrictions on mortgage lending. Banks can now only devote a maximum of 15% of their new lending to mortgages where the size of the loan is more than or equal to 4.5 times the borrower's income (currently the market devotes about 10% to these).
Further, all lenders will now have to make sure that mortgage applicants can afford mortgages if Bank Rate rises by three percentage points. These changes are not designed to alter the current mortgage landscape. Rather, they represent a safeguard against lending becoming significantly riskier than it is now.
Limited and gradual. In front of the Treasury Select Committee, Bank of England Governor Mark Carney again highlighted the buoyant economy, while pointing to the softness of pay growth. It's weak enough to convince the Bank that output still has room to grow without it pushing prices up too sharply, for now.
The day is coming when Bank Rate will rise and Monetary Policy Committee members want us to understand four things. Rates will rise in small amounts. They will rise gradually, over many years. We should have in mind something no more than 3% a few years from now. And it will be many years indeed before Bank Rate returns to 5%.
Right direction. The country’s statisticians have put a bit more colour on what drove the UK’s solid 0.8% growth in Q1 of this year. Households are still spending, but in Q1 they refrained from dipping further into their savings to do so. Business investment was one of the fastest growing areas, now 10% higher than this time last year and back up to levels last seen in 2008.
Trade made a contribution but it was down to less imports rather than more exports. Overall this is a better picture that bodes well for the sustainability of future growth, particularly with investment picking up.
Puzzling. US GDP fell by 2.9% in the first quarter, the largest drop in five years. Bad weather is the popular suspect and it could have contributed to the large inventory rundown, which was the biggest drag on growth. Most indicators suggest a subsequent Spring bounce.
But the weather explanation leaves a lingering doubt. The places where it was worst all border Canada, where GDP grew by 0.3%. Does Canada deal so much better with bad weather?
Not quite. With sales of new homes up 18.6%y/y in May and Case Shiller reporting prices rising 10.8%y/y in April it would be easy to believe that the US housing market is in bubble territory.
The picture is more nuanced. Sales of existing homes account for around 90% of transactions. They were up 4.9%m/m in May but down 5.0%y/y. And estate agents said the supply of homes on the market was 6.0% higher than a year ago, which should help curb price rises.
The straggler. The eurozone’s Purchasing Mangers’ Index (PMI), a key survey of private sector activity covering both manufacturers and service providers, continued to point to steady, if unspectacular, growth in June. Germany, Spain and Italy are delivering readings above 50 and therefore indicating continued expansion.
But not for the first time in recent years it’s France that is letting the side down. Its composite reading fell further into negative territory and meant that the reading for the region as a whole was the lowest this year.
A challenging outlook. Evidence continues to mount that China’s post-crisis investment and debt binge is beginning to take its toll on growth. The manufacturing PMI is hovering around the neutral 50 mark. Property prices have begun to correct and as a consequence investment and construction are slowing.
The reacceleration of the US and eurozone economies would lend a helping hand to the country’s exports. But with the investment engine spluttering, a continued gradual slowdown in growth seems likely in the coming months.
More to do. How is Japan’s attempt at economic rejuvenation, dubbed ‘Abenomics’, faring? The labour market is in the best shape it’s been since the 1990s with unemployment at 3.5%. And on the face of it, there is success to report in the fight against deflation. The core rate of inflation was 2.2% in May – the highest in 17 years.
But a sharp fall in the currency over the past 18 months, which makes imports more expensive, and a VAT hike in April is artificially boosting the figure. With wage growth very weak, there is more than a lingering doubt that Japan has not achieved the great escape, yet.