Look behind the spin

May 8, 2024

Since launching Woodford Views just over two weeks ago, I have aimed to give you an honest, evidence-based appraisal of the UK economy and its immediate outlook. In doing so, I find I am increasingly at odds with a consensus economic narrative that relentlessly focuses on a glass-half-empty interpretation of pretty much everything.

Take, for example, the BBC's lead economic story presented by Faisal Islam on the News at Six last week. The report distressingly noted that house prices had registered a second successive fall in April following March's 0.2% decline. However, the report was focused on seasonally adjusted data and overlooked the non-seasonally adjusted figures, which showed an increase in house prices during the same period—a detail conspicuously absent from the narrative.

Moreover, the mortgage approval data from March, the highest number since September 2022, suggests a promising leading indicator for future house price trends.

This type of selective reporting is another example of the consistently downbeat narrative we are fed on the UK economy, which I believe distorts our overall impression of economic performance. Clearly, the housing market is far from booming, but neither is it in the sort of trouble the consensus would have us believe, and I would argue that with wages up 25% since the pandemic, it is not surprising that average house prices are now only 4% below the peak reached in August 2022.

The narrative does not end with skewed housing data. This week, the OECD, in their typically cheerful fashion, published their latest forecast on the UK economy, which was quickly picked up by the media principally because it was, as usual, very gloomy.

The Guardian’s headline was, “UK will be the worst performer in G7 next year, OECD says”. Citing high interest rates and the lagged effects of high inflation, the OECD has downgraded its forecast for UK growth in 2024, from 0.7% to 0.4%, and it goes on to suggest that growth in 2025 at 1%, will be behind every other member of the G7. 

Now, the OECD is in jolly good company because the Bank of England has also had a pretty negative view about the outlook for the UK economy reflected in its own forecasts which contain two scenarios. One in which it models growth based on base rates as reflected in the forward curve and one in which it assumes no change in base rates. As recently as February, the Bank of England said that in the scenario where base rates remained at 5.25%, the UK economy would remain in recession (following the two negative quarters in the second half of 2023), and this is reflected in its Q1 GDP forecast of 0.1% growth. By way of comparison, the massively (I jest) more optimistic OBR forecasts 0.2% growth for Q1.

Such consistent underestimation feeds into a broader narrative that undervalues the resilience and potential of the UK economy. This Friday, when the UK Q1 GDP figure is released, I anticipate it will prompt a reevaluation of these gloomy forecasts.

Following positive outcomes for both January and February, the result for Q1 will be growth of 0.4% even if March is flat. My guess is that March will see some growth, not least because the construction sector should have benefitted from a slightly less wet month, which could push Q1 up to 0.5% growth.

If I am right, not only will this directly contradict the Bank of England’s gloomy assessment of what would happen if base rates didn’t fall (they haven’t), but it will also clean bowl the OBR and, just over a week after the OECD’s latest forecast change, send its middle stump cartwheeling towards the boundary.  

These downbeat forecasts for the UK economy are not unusual. We seem to be overwhelmed with them. It is crucial to look behind the spin and assess the real economic indicators.

So, stand by for upgrades to UK growth forecasts from across the board, but don’t expect any of these institutions to reflect on why their negativity has been so misplaced. One should expect deafening silence on that subject. (Rest assured, I will write about this in a future blog.)

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