What is going on and what is likely to be the Bank of England’s next move?

Recession Re-Confirmed!

The Office for National Statistics today published revised estimates showing we are indeed in a recession, although Quarter 2’s retraction is likely to be smaller than first thought at 19.8% compared to the initial estimate of a 20.4% drop. This confirmation is not particularly surprising given the lockdown’s impact on trade.

As some lockdown measures have been reintroduced this trend is likely to continue into Quarter 3’s figures.

Property Boom!

A report by NAEA Propertymark, a trade body for estate agents states that 13% of properties sold for more than the original asking price in August. This is the highest number since November 2015.

According to Mark Hayward, Chief Executive of NAEA Propertymark:

…Last month, we witnessed a boom in the number of prospective buyers following the government’s announcement of a Stamp Duty holiday, and it seems this is increasing the level of competition in the property market. With the increase in the number of prospective buyers since this announcement, many buyers are clearly willing to pay over the asking price in order to secure their dream home.

Housing Report, August 2020

Currency Printing And The Bank Of England’s Next Move!

Why are house prices going up? In part it is due to factors such as the lockdown and Government support for business e.g. backing for loans, but it is also down to Bank of England currency printing. As the currency supply is increased, the value of the currency goes down and therefore it makes sense to move capital into assets with a limited supply such as property.

The Bank of England is likely to continue to print more currency in future waves of QE. However, it also looks set to use another economic tool if things continue to get worse, negative interest rates!

Negative interest rates are where the central bank charge banks to store currency rather than pay them interest. The aim of doing this is to encourage banks to lend.

The Bank of England has played down the idea of using negative interest rates but announced in September that “it would take a detailed look at how negative interest rates might work in practice during the last three months of the year” according to the BBC.

As the central banks continue to back themselves into a corner with accelerated currency printing, negative rates seem to be inevitable. The Bank of England seems to be preparing for them while attempting not to spook the markets.

If this happens, it is likely that property will receive a further pump in price.

A recession is when there is two consecutive quarters where the GDP of the nation drops i.e. there is a drop in the total expenditure of the economy. Quarter 1, January to March, saw a drop of 2.2% and Quarter 2, April to June, saw a massive 20.4% drop according to the Office for National Statistics.

No Surprise!

Lockdown started on 23 March 2020, and worries about coronavirus started even before this, so of course there was a drop in the total spending in the economy! With cafes, bars and other business closed this should come as a surprise to no one. So the announcement that we are in a recession is a formality rather than actual news.

The extent of the drop may be argued to have been a surprise. However, the Governor of the Bank of England said in July that the UK could have a “23 to 25 per cent” contraction in the second quarter. The UK has a large hospitality sector so a lockdown was inevitably going to have this type of effect.

Short Term Recovery

We are already seeing signs of a recovery with the Office for National Statistics stating there has been a rise in GDP of 8.7% during June. With the lockdown over, this is likely to continue and we should see this trend continuing in the next quarter.

The Bank of England printed £100 billion in new currency in June in its latest round of quantitative easing.

What is quantitative easing?, BoE

Continual currency printing means that the value of existing currency will go down overtime. However, the circulation of this currency means that the total spend in the economy will go up, leading to an increase in GDP.

This currency printing, combined with the various measures used by the Government such as Bounce Back loans, self-employment grants and Eat Out To Help Out discounts, are likely to see the economy appear to recover significantly.

In the short term, it is possible that we will soon come out of this recession and see economic growth again.

Long Term Problems

Longer-term is a different story. As government programmes stop and the build up of currency in the economy either forces the Bank of England to contract the currency supply by rising interest rates or do nothing and see higher levels of inflation, the real problems will start.

If the Bank of England decides to continue with further rounds of quantitative easing, things could get even worse. The continued printing of currency will cause prices to rise. Holding your savings in currency will not be a good idea at this point as its purchasing power will be decreasing fast. Assets with a limited supply will do well in my opinion such as gold/silver, Bitcoin and property.

In my view, this recession is more of a warning than a reality. It is giving us time to prepare. The ONS announcement told us what we already knew and the media headlines were typically alarmist.