Economic Update: 29 September 2017

The Investment Management team round-up some of this week’s news.

Property

Although unemployment has dropped to a 40-year low, economic activity has cooled slightly. Manufacturing and Industrial production, boosted by a weaker pound, remain healthy, but worries around Brexit are infecting forward looking business sentiment indicators. The connection between hard recorded data and forward sentiment has shifted.

Against an ever changing economic backdrop one area we have not looked at recently is the UK residential property market. The value of our homes imparts a wealth effect which in turn affects consumer behaviour, with rising house wealth supporting consumption.

It is accepted that house price levels today are being supported by low interest rates courtesy of the Quantitative Easing (QE) programme. Furthermore, QE, alongside rising house prices has supported consumption. Both feed positively into economic and price growth.

In the chart below we highlight 3 different house price index providers who aim to show what is happening to prices across the housing market. Over longer periods, generally speaking, they tend to track one another fairly closely but recent month on month price changes expressed below show different outcomes.

In August the Halifax recorded an increase of 1.1% in real estate prices, while Rightmove exhibited a decline of -0.9%. Nationwide house was more or less in the middle with a drop of -0.1%.

UK House Price Growth (Year on Year %)

Source: Bloomberg, August 2017

If we consider what has happened over the last year house price growth figures, across the three index providers, range from 2.1% to 3.1%. This is a slight decrease on the prior year figures when house prices rose between 4.1% and 6.9% but was still generally positive.

An important measure impacting house prices is affordability. With the recent pick-up in inflation and lacklustre wage growth, incentives for first time buyers are becoming increasingly necessary. Government incentives such as ‘Help-to-Buy’ and the Lifetime ISA are enabling UK residents to obtain credit more easily, helping affordably. On the flip side, low-income households are more vulnerable to potential interest rate rises. Of course, the need to ensure affordability is a factor taken into account by those responsible for economic management and policy decisions.

It is evident that for a healthy housing market to be maintained continued improvements in labour productivity and rising real wages across the economy are vital.

UK Wage and Price Growth (Year on Year %)

Source: Office for National Statistics, August 2017

Plug In, Switch On, Take Off

Our weekly economic monitor focuses on mainstream economic data. However, we also watch out for technology shifts that have the potential to reshape the economic landscape.

This week we had Sir James Dyson, the British inventor, best known for his vacuum cleaners, announcing that Dyson will enter the electric vehicle industry. He is working on what he calls a “premium” electric car that will go on sale in 2020.

The company has been working on electric battery technology for almost two decades and will budget £2 billion on the car and battery technology. Dyson predicts their automotive business will “quickly” outgrow the rest of the company. Half of the £2 billion will be spent on battery development with the other half spread between design and manufacturing. The venture will also receive funding from the British government to help with its future strategy – by 2040 the UK government plans to ban the sale of new diesel and petrol cars in a bid to encourage people to buy electric vehicles.

In 2015, Dyson hinted at what was to come when they acquired Sakti3, a Michigan-based designer of solid-state batteries for $90m. Their ambitions are now official. They will enter the electric vehicle production race with the aim of establishing a team of 400 engineers, drawn from manufacturers including BMW, Aston Martin and Tesla.

This week also brought another new announcement related to battery technology. EasyJet announced their plans to develop commercial passenger aircraft powered by electric batteries instead of conventional aero engines. The proposal is to fly passengers on its short-haul routes, possibly within 10-20 years. The company announced that a range of 335 miles is likely, with their developers being a new US firm call Wright Electric, which has already built a two-seat battery-powered plane. EasyJet say they expect to be able to cover popular routes such as London to Paris, Brussels, Amsterdam, Cologne and Edinburgh, and that such a plane could carry 220 passengers. Wright Electric said EasyJet’s support was a “powerful validation” of plans that would involve developing “new energy storage chemistries” that are lighter than conventional batteries. The potential, if successful, will lead to a further big cut in the amount of fuel being burned in the air and on the ground. It will also lead to much quieter aircraft.

Advances in battery technology are opening the car industry to new entrants with traditional carmakers facing a barrage of challenges to their business models from the need to invest in electric vehicles and self-driving technology. It is also interesting to note how changes in one sector expand into other sectors such as aviation. Just as Apple and Samsung’s smartphone took over market share from mobile handset giants Nokia and Blackberry a decade ago, the rise in electric vehicles is shaking up industry and challenging everyone to think differently.