It will not have escaped anybody’s attention that we are in an election year.
Barely had the strains of Auld Lang Syne died down than the politicians were in full campaign mode. There may be four more months of this. If we are not sick of politicians now, we soon will be.
This is not to say the election is unimportant, but this one is the most unpredictable for a very long time. Ask political pundits for their predictions and they change the subject. My tentative prediction is that the Conservatives will maintain their position as the largest party – largely because of their poll lead on the economy and David Cameron’s big lead over Ed Miliband on leadership. Even if I am right, there is no guarantee that we will move seamlessly into another coalition.
What we must not do is allow the politics to put a freeze on everything else. Recent survey evidence for the service sector, construction, manufacturing and mortgage lending, points to a slight slowdown in activity as we move into 2015. It will be in nobody’s interest if it develops into something more serious.
What is in prospect for 2015 outside the politics? For the housing market weaker mortgage approvals, which we have seen for several months – probably under the impact of the Mortgage Market Review – will lead to a flattening of activity. There will be little or no increase in housing transactions and house prices will either record a very modest national rise, perhaps 2% to 3%, or not even do as well as that. The Centre for Economics and Business Research predicts a 0.6% drop in prices, led by a 3.3% decline in London.
What about commercial property? This should be a pretty good year for consumer spending and thus for retailers. The halving (and more) of oil prices over the past six months is the equivalent of a tax cut. It will deliver very low inflation in the coming months which, in combination with an uptick in wage growth, will result in rising real incomes. Nobody can say for sure whether consumers will spend or save this income boost but the backdrop is favourable.
It is also favourable for most businesses. Corporate profitability is on the up, helped by falling costs. Economists at City firm Jefferies International point out that company balance sheets have been repaired and corporate profits are rising at around 10% a year. Politics aside, the outlook for investment is good. And, while the growth in employment this year may not match the 600,000 recorded in 2014, firms still have the appetite to recruit and expand. That will boost demand for office space. The rise in self-employment, meanwhile, is set to persist.
What about interest rates? The Bank of England is supposed to “look through” temporary inflation weakness due to external factors such as oil but we can bet it will not. Very low inflation will make the majority of the Bank’s monetary policy committee reluctant to raise rates.
What could go wrong? Plenty. The eurozone is still in a fragile state and there are plenty of geopolitical risks. We could do without this election, let alone the campaigning. These things are sent to try us.
David Smith is economics editor at The Sunday Times
