Duncan’s Economic Blog

Asset Prices & Rebalancing

Posted in Uncategorized by duncanseconomicblog on October 7, 2009

Yesterday we got two bits of economic data in the UK. Industrial production fell, whilst house prices rose.

These aren’t isolated data points, they are part of trend that has been in place since the Spring.

The widely respected National Institute of Economic and Social Research yesterday said:

Our monthly estimates of GDP suggest that output was unchanged in the quarter to September as compared to the second calendar quarter of the year. Industrial production was much weaker than we expected in August. In part this was because of reduced activity in the oil industry which is known to be erratic. But the manufacturing sector showed further weakness as well.

In other words, they think the recession isn’t yet over. They also included this excellent chart:

NIESR chart

For all the talk of green shoots, we still have rising unemployment and collapsing investment levels. What little ‘growth’ we are seeing is  the result of companies rebuilding inventories (which will be temporary in the absence of private sector final demand) and government spending.

And yet despite this, asset prices are rising. House prices are up 3 months in a row. The FTSE 100 has rallied a massive 46% since March.

Now as someone who works in fund management, maybe I should just keep quiet and be thankful. Rising asset prices are good for my clients and good for me.

But I do have to question what is causing this?  Irrational exuberance on the likely strength of any recovery?  A side effect of quantitative easing? Future inflation worries? An excess of global liquidity, which is simply being used to purchase assets rather than help the real economy?

The economy needs to be rebalanced. But not in way that favours holders of assets over the real economy. This is raising serious questions about the manner in QE is pursued, something I shall return to in a further post this week.

6 Responses

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  1. newmania said, on October 7, 2009 at 10:25 am

    You mean we have inflation ,….oh boy Duncan if that turns out to be true can you promise to have the words I WAS WRONG tatooed on your forehead Mr. Mugabe lite

    • duncanseconomicblog said, on October 7, 2009 at 10:32 am

      I don’t think we do have an inflation problem. If we do turn out to though, I will gladly admit that I was wrong.

  2. Liam Murray said, on October 7, 2009 at 10:52 am

    This sounds like a provocative / partisan question but it’s genuinely not – could there be anything to the explanation that an imminent general election will free the next government (whoever they are) from short-term electoral considerations and bring about far more swinging cuts in public spending than either party are acknowleding at the moment (creating more opportunity for private investment etc.)?

    The fact that all indications suggest a Tory government would lend weight to that as well.

    I know it drags the partisan into what should be a dry policy issue but there may be a link…

    • duncanseconomicblog said, on October 7, 2009 at 11:30 am

      Liam,

      I think this deserves two answers.

      One the question, is the prospect of this supporting the gilt markets?, I’d refer you to Chris Dillow yesterday:

      http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2009/10/osborne-vs-the-markets.html

      On your more general question…

      It really depends on what you think the driver of investment is. Personally I don’t buy that policies aimed at increaseing savings will lead to hihger investment. Nor do i buy the notion that government is somehow ‘crowding out’ private investment.

      The Bank’s most recent credit conditions survey notes that:

      “In contrast to the position for lending to households, some
      lenders active in the corporate lending sector reported that an
      improvement in the cost and availability of funds had driven
      the increase in corporate credit availability over the past three
      months. Desire to increase market share had also reportedly
      played a role for some lenders. The impact of the economic
      outlook on corporate credit availability was judged to have
      been unchanged over the quarter, having acted to reduce
      availability since 2007 Q2.”

      Annex 3 (pages 12/13) is worth a look:

      http://www.bankofengland.co.uk/publications/other/monetary/creditconditionssurvey091001.pdf

      There was clearly a collapse in demand for credit from corporates (i’m assuming here this ties in with investment), rather than any crowding out of funds.

      I think any government cuts programme starting next year, risk causing a severe double dip recession. In whihc case I simply don’t see why corporates would choose to invest.

      Krugman is also worth a glance:

      http://krugman.blogs.nytimes.com/2009/09/28/crowding-in/

  3. Liam Murray said, on October 7, 2009 at 11:53 am

    Thanks Duncan.

    It’s always difficult mixing in motive though – appreciate your point that “personally [you] don’t buy that policies aimed at increaseing savings will lead to hihger investment” but if enough people in the right places have that view then that will, in turn, drive their investment behaviours in a certain direction (regardless of the objective truth of that proposition).

    I take your point on ‘crowding out’….

  4. […] in effect the Bank will have produced £100 of reserves and only got £90 back, say).  One I hope Duncan has some insight on (read his post for a good sign of what QE is really […]


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