If August was a month of big stock market falls, largely generated by worries about China, September has been the month when everybody has been trying to work out what it all means. The market panic may be over, for now at least, but it has left a legacy of uncertainty. What does it mean, and what in particular does it mean for property?
The first significant change is in the interest rate outlook. In July, it looked certain that the US Federal Reserve would raise rates at its 17 September meeting. But even before the Fed decided on no change, the smart money had moved away from expecting a hike.
The Fed did not want to give the impression it was merely responding to August’s market falls. But the clue to the delay was in its statement that it was “monitoring developments abroad” and that “recent global economic and financial developments may restrain economic activity somewhat”. China was on its mind.
The Chinese slowdown has two implications. One is that if the world’s second-largest economy is growing more slowly, then global growth is reduced. The other is that slower Chinese growth has the effect of pushing down inflation, because its weaker demand means lower prices for oil and other commodities.
With the Fed on hold, but still, at this stage, expected to announce a small increase in December, there are implications for the UK. Bank of England governor Mark Carney is sticking to his line that a decision on interest rates – which would be the first rise since 2007 – would come into “sharper focus” at the turn of the year. This has been taken as a signal that rates will go up just before or after Christmas.
But markets have become increasingly sceptical about this, particularly since the Fed’s decision. Bank of England chief economist Andy Haldane has even suggested the next move in rates could be down.
Citigroup has just trimmed its growth forecasts, from 2.8% to 2.6% for this year and from 3% to 2.5% for next year. More significantly for property, it has also pushed out its expectations for interest rate hikes. It now thinks there will be just a single quarter-point hike next year, and not until the final three months of 2016. It has also lowered its 2017 forecasts, now seeing a Bank rate of only 1.25% at the end of the year, half a point lower than before.
The good news – for many – of low rates is tempered by the fact that what is keeping them low are concerns by central bankers that economies are not strong enough to stand even a modest hike. When the Fed left rates unchanged on 17 September, there was a notable lack of stock market euphoria.
Will China drag us all down? I think the worries about China are overstated and that, as far as property is concerned, we will still see capital flowing out of China to other markets, including the UK. If anything, those flows have increased as Chinese investors seek safe-haven homes for their funds.
What the recent episode reminds us is that the hangover from the financial crisis is long. The UK has zero inflation and near-zero interest rates, both far from the norm. Deflation, a big fear in the crisis, remains a threat. The longer rates stay low, the more it will be seen as the new norm, and the harder it will be to return to the old norm. The temporary is starting to look permanent.
David Smith is economics editor at The Sunday Times
