[16th April 2021] A big risk to the UK economy

Difficult to know who reads these blogs or when they get read, but with the broad assumption that you may be reading this sometime in early 2021 and you have a basic interest in economics and markets you will likely agree with me when I say that we are currently 'off to the races'.

What do I mean by that? Well global economy's are enjoying the multi pronged benefit of huge central bank stimulus - perhaps like the US with actual cheques arriving in the post to its citizens, or like the ECB with direct market action and bond purchases, or like the UK where it is giving tax breaks to the housing market with SDLT freeze and more recently a government backed mortgage guarantee for high LTV loans.  Of course some economies are using a mixture of stimulus measures.

Add to this the natural recovery as we emerge from broadly a year of lockdowns and restrictions and as we head into earnings season corporate earnings are beating on the top and bottom line with the consequence that equity markets making record highs in the US and very strong recoveries seen in UK, EU and Asia.

Happy days you might think.  Yes indeed Happy days if you are long equities and other assets, yet there is a storm brewing in the UK.

One of the big failures in this authors opinion with UK policy is that we are continuing to stimulate a housing market that didn't really need stimulating.  That inevitably creates asset price inflation.  You can see that in any number of headlines.  Here is a summary from the Investors Chronicle of April 15th:-


"On the face of it, the UK’s housing market has become entirely dislocated from the reality of the economic situation the country finds itself in. In a year when gross domestic product suffered its largest contraction in more than 300 years, house prices accelerated to notch up the highest annual growth rate in over six years by December 2020."

Much of this growth is funded with the very common 2 year fixed rate mortgage, which is by far the most popular product usually because it has the lowest initial rate and even with the associated fees leaves the lowest month payment for borrowers to meet.

So what is the problem?  Well in a benign low interest rate environment [where customers are able to roll their old 2 year product onto a new 2 year product at a similar rate] of course nothing.  Yet what this 2 year product landscape means for the UK economy as a whole is that as rates increase it instantly takes funds out of the economy because it is likely to impact a larger segment of borrowers almost immediately, and those borrowers are forced to make greater monthly mortgage payments.