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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK growth slows; London house prices fall – as it happened

An estate agent’s window in London.
An estate agent’s window in London. Photograph: Yui Mok/PA

Closing summary

Time to wrap up.

A blizzard of economic data has highlighted problems in the UK economy today.

Growth over the last 12 months has been revised down to just 1.5%, the lowest since 2013, despite a pick-up in business investment.

The UK’s current account deficit also widened, to over £23bn, consumer credit has risen, and service sector growth seems to have cooled sharply in July.

Jon Cunliffe, Chief Investment Officer of Charles Stanley, says:

“The deterioration in the UK’s current account position is disappointing, as it underlines that the sharp devaluation in Sterling has not fed through into a better trade position with the rest of the world.

Analysts have also been predicting that London’s housing market has hit a turning point, after prices fell by 0.6% over the last quarter. Details start here.

UK house prices

Bank of England governor Mark Carney has had another busy day, telling the Today Programme that consumer debt is a concern, and that the Bank can’t fix inequality (even though its monetary policy has distributive effects).

He also repeated his warnings that borrowing costs could rise soon:

Carney has also pledged to improve the bank’s communications.....and been chastised by the chief economist of Citigroup for sticking his oar into the Scottish and Brexit referendums.

Christine Lagarde, meanwhile, has predicted a world where digital currencies challenge traditional ones, and artificial intelligence plays a greater role in running our central banks.

In the City, the FTSE 100 has jumped by around 0.75% today, while the pound has dipped to $1.341 following the growth downgrade.

That’s all for this week. Thanks for reading and commenting. GW

Carney: We need to communicate better

Mark Carney
Mark Carney Photograph: Bank of England

We need to make the Bank of England more permeable and comprehensible, Mark Carney concludes, so that the public understands what it’s up to.

He admits that a middle-aged man in a blue suit reading out a speech simply doesn’t cut it these day (even though that’s exactly what Carney is doing right now).

The Bank is trying to reach out to the public; officials have met 10,000 people at regional meetings, and it’s holding a series of Town Hall events too.

It has also racked up one million hits to its Bank Underground blog (which is well worth checking out)

But....Carney says the BoE must do more, and use social media to keep the public better informed.

We need to do a much better job of taking bite-sized bits of analysis, cut them and send them out so people can grab them understand what the trade-offs are in monetary policy, why the Phillips Curve has gone down...

How much capital the banks really do have, and if house prices go down by a third what would happen to the banking sector.

Some of it will be good, some of it will be incomprehensibly impermeable.

At least Carney isn’t setting the bar unrealistically high....

Carney then explains why he doesn’t support calls for a new strategic body, involving the Treasury, to oversee systemic risk issues.

Our current arrangement does involve picking up the phone when the chancellor phones...and phoning him up too when there’s a financial stability problem, says Carney.

Plus, the Bank must tell the government if it thinks taxpayers funds are at risk.

Mark Carney is wrapping up his two-conference on central bank independence now.

Governor Carney says the consensus from the meeting is that Bank of England independence has worked, but with several buts.

One is that Britain hasn’t yet tackled the ‘too big to fail’ problem – the fact that our largest banks would still need to be bailed out if they collapse.

Carney says:

Everywhere I’m asked, when are we going to tackle the ‘too big to fail’ problem, and its fundamental unfairness.

He explains that the Bank has all the tools it needs, but it hasn’t yet completed the job.

Carney also responds to Willem Buiter’s scorching criticism of meddling central bankers, arguing that the Bank had a legal responsibility to express concerns over the 2014 Scottish independence referendum.

If you’re testifying at parliament and MPs ask you if Scottish independence has financial stability risks, ‘you can’t dodge it’, says Carney.

Professor Ngaire Woods of Oxford University takes issue with Willem Buiter’s comments that central bankers should stick to monetary policy.

She warns that this will simply make the Bank of England look remote and uncaring.

The problem with a strict interpretation [of a central bank mandate] is that central banks will look like what most of the people in most countries think the elite look like -- people who are just not listening.

Financial crises have led to the rise of the far-right, so it’s really important that the Bank shows that it is listening to people’s concerns, she adds.

Clearly no-one told Willem Buiter that the Bank of England is having a celebration this week....

Buiter blasts central bankers

Back at the Bank of England’s conference, Citigroup’s Willem Buiter is delivering a forensic explanation of central bankers’ failings since the financial crisis began.

Buiter says central bank independence is under threat because the bankers themselves have failed to ‘stick to their knitting’, and instead have got involved in politics.

He accuses them of becoming “partizans” in the debate on fiscal policy, structural reforms, and inequality, including:

This is compounded by the failure of monetary policy to do better since the financial crisis, Buiter continues. He says:

Central banks have some output legitimacy, but have very little input legitimacy.

And there is simply not enough accountability at some institutions. The ECB, for example, should start holding a formal vote at its meetings, and publish the results.

Updated

This drop in London house prices could be a “milestone” for prices in the capital, says Vicky Fowler, partner at law firm Gowling WLG.

She believes that falling real wages are to blame, rather than an exodus of overseas buyers.

Fowler explains:

A recent Mayoral report highlighted that overseas investors count for just one in ten of the central London properties in current ownership. Recent figures highlighting a widespread decrease in wage levels throughout the UK could, therefore, be having more of an effect on the capital’s property market than originally thought.

“Indeed, with Sadiq Khan having recently committed to the building of more affordable homes, one wonders if this could be the beginning of a downward trend where the proportion of London’s properly affordable homes grows significantly and a corresponding downward pressure on land values”.

I missed this earlier (under the deluge of UK data), but eurozone inflation has come in below forecasts this month.

Eurostat’s ‘flash’ estimate shows that prices in the euro area only rose by 1.5% in September, the same as in August. Economists had expected a rise to 1.6%.

More significantly, core inflation (stripping out food and energy) fell from 1.2% to 1.1%.

That means the European Central Bank’s money-printing stimulus programme isn’t having the effect Mario Draghi hoped for - so the ECB will probably keep printing for longer!

Looking back at house prices... this charts shows how London properties are still waaaay beyond the average earner, despite dropping 0.6% over the last year.

Updated

Christine Lagarde is also asked whether digital currencies could eventually mean that monetary policy becomes redundant.

Q: If currencies are truly global...could we reach a point where exchange rate targeting is necessary as that’s the only way that markets can decide the strength of a country’s economy?

Lagarde argues that in the short term, the fragmentation of the financial world makes central bankers more necessary.

But eventually - who will set the value of money? The future will tell. Que sera sera, Lagarde smiles.

Back on digital currencies....Christine Lagarde suggests that they could be included in the IMF’s own basket of currencies, its ‘special drawing rights’.

Lagarde warns that policymakers must remember that new technologies must work for all.

This was neglected when everyone was “beating their chests” about how globalisation was helping the world economy to grow.

Let us make sure that these new technologies, and the way they will adapt the world economy, will benefit everyone, she concludes. Otherwise, by 2050 we might be “very sorry” that we didn’t remind ourselves of that today.

Lagarde: Prepare for more AI in central banking

Christine Lagarde also predicts a day when artificial intelligence plays a much bigger role in running the economy.

She tells the Bank of England conference that artificial intelligence is improving fast. Even the world’s best Go players have found themselves outmatched by computers, who could self-learn and develop better strategies.

In a few decades time, we might find that smart machines are helping to run our central banks too.

Lagarde says:

Clearly the global economy is vastly more complex than a game of Go. But over the next generation machines will almost certainly play a much larger role in assisting policymakers offering realtime forecasts, spotting bubbles and uncovering complex financial links.

Young economists shouldn’t cry into their spreadsheets too much, though. Lagarde says humans will still be needed to run the system.

And she also warns that the public may find it hard to trust computers - and could computers explain their decisions in plain English (something existing human central bankers have struggled with....).

As Lagarde puts it:

“Even with the best algorithms and machines, targets will be missed, crises will occur, mistakes will be made. But can machines really be held accountable — to the young couple unable to buy a house, to the working mother finding herself unemployed?

Updated

Lagarde: Central banks must pay attention to digital currencies

Christine Lagarde, the head of the International Monetary Fund, has warned central bankers not to close their eyes and ears to the rise of digital currencies.

She’s giving a speech on what the global economy will look like in 20 years, at the Bank of England’s conference on central bank independence in London today.

Lagarde says that digital currencies, such as Bitcoin, don’t pose a major threat to the current status quo of fiat currencies today.

Digital currencies are “too volatile, too risky, too energy-intensive” to replace traditional currencies today, she argues. They’re not scalable enough, they’re too opaque for regulators to get a grip on, and some have been hacked (for example, the Mt Gox bitcoin exchange which failed in 2014).

Click to watch Lagarde

But....in 20 years, this situation may have changed, says Lagarde. Eventually, digital currencies could become safer and more reliable, especially in less stable regions.

The IMF chief predicts:

“So in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money.

Central banks such as the BoE need to stay alert, for the moment when a digital currency “knocks on the door” and expects to be treated like sterling.

Updated

Sterling has fallen, following the news that Britain’s economy grew slower than expected over the last year.

The pound has dropped by over half a cent against the US dollar to $1.338, which is nearly a two-week low.

That’s despite Mark Carney’s latest hint that interest rates will probably rise soon.

Craig Erlam, senior market analyst at OANDA, says this morning’s growth figures have hit sentiment in the City.

Softer GDP data for the second quarter of 1.5%, down from previous estimates of 1.7%, triggered the slide in the pound, which was already looking a little vulnerable following recent moves.

Concerns over the ongoing Brexit talks may also be hitting the pound. Earlier today, European Commission chief Jean-Claude Juncker warned that it will take “miracles” for the two sides to start discussing their future relationship next month.

Updated

Adam Posen, a former Bank of England policymaker, says central bankers cannot ignore the fact that they make us all richer, or poorer, by their actions.

Posen was speaking at the Bank’s conference on independence (you can follow it live, here).

He’s not responding directly to Mark Carney’s comments on inequality (details here), but he’s put his finger on the underlying issue. Namely, monetary policy has distributional effects.

Carney’s argument is that it’s up to governments to address that - most likely by changing the tax rate to claw back money from wealthier citizens who benefit when the Bank drives up asset prices through its QE asset purchase scheme.

Posen says that central bankers have to be open about the fact that they are making a choice between inflation and unemployment when they set interest rates. Monetary policy dictates how fast prices rise, or how many more people join the ranks of the unemployed.

For 20 or 30 years, Posen says, central bankers have “got away with arguing that they only focus on aggregates” - ie, the overall impact of their policies.

But that era is over; if central bankers want to keep the public’s support, they need to be more explicit about the impact of their actions.

Monetary policy does have its limits, of course; Posen also reminds us that some central bankers are looking to governments to do more.

Posen wraps up with this quote from Jane Austen (who now appears on the new £10).

Adam Posen's closing slide

In more disappointing news, the UK’s current account deficit has widened (yes, there’s a lot of data out this morning).

The ONS reports that the current account deficit jumped to £23.2bn in April to June, up from £22.3bn in January to March.

This was mainly caused by a rise in foreign earnings on investment in the UK, which is growing faster than Britain’s own earnings overseas.

ONS

The trade deficit narrowed, though, to £6.5bn thanks to a rise in exports.

ONS

New figures also show that Britain’s consumers continue to ramp up their borrowings.

Figures show that consumer credit jumped by £1.58bn in August, up from £1.2bn in July.

This may alarm Mark Carney given his comments about ‘frothy’ debt this morning.

It suggests more people are turning to credit to finance new purchases, or to cover the gap between wages and inflation.

Updated

Worryingly, the ONS also warns that Britain’s service sector had a bad July, with its “Index of Services” decreasing by 0.2% during the month.

The ONS says:

  • The largest contribution to the month-on-month decrease came from the transport, storage and communication sector, which contributed negative 0.22 percentage points
  • The industry largely responsible for the fall on the month was motion pictures, which contributed negative 0.19 percentage points; this decrease follows a particularly strong June for the industry.

These new UK growth figures also show that business investment has picked up, but the economy is still barely growing once you adjust for population changes.

Here’s som key points:

  • GDP per head grew by 0.1% in April-June, much slower than the headline growth of 0.3%
  • Business investment rose by 0.5% during the quarter (revised up from 0%).
  • Household spending rose by 0.2% (revised up from 0.1%)
  • The Household Savings Ratio rose to 5.4%, highest since Q3 2016

UK annual growth rate cut

Breaking: Britain’s annual growth rate has been revised down.

UK GDP rose by just 1.5% annually in the second quarter of 2017, new figures from the Office for National Statistics show. That’s down from an earlier estimate of 1.7%, and is the slowest annual growth since 2013.

However, growth during the quarter was unrevised, at 0.3%. The service sector was the only part of the economy that grew.

More to follow....

Updated

Brexit has helped to push London’s housing market to an ‘inflection point’, says Nicholas Finn, executive director of Garrington Property Finders.

“The softening of prices was initially led by the capital’s prime market, which was knocked sideways both by Brexit and in the wake of the introduction of higher rates of stamp duty for high-value homes.

“But it is now spreading from the central boroughs – which saw prices rise fastest during the boom – to other areas where the growth came later.

“As a result the market is at an inflection point, as the froth evaporates and prices gently correct to more realistic levels.

The decline in London house prices will make it a little easier for people to break into the housing market (although with average prices of £471,761, the capital is well beyond most pay packets).

Here’s Hannah Maundrell, editor in chief of money.co.uk, says:

“The market seems to be cooling slightly in London which will hopefully give people more of a chance to get on the housing ladder – despite still being the most expensive region.

“Prices are still on the rise for the rest of the country, with the East Midlands seeing the greatest price increase. It’s important here to make sure you do your research before you buy to get the best deal.

UK house price by region

Here are some more charts from the Nationwide house price survey (details start here, if you’re just joining us)

.
.

Updated

Carney: We can't fix inequality

Mark Carney also insists that the Bank of England isn’t to blame for economic inequality.

Asked if capitalism is broken, the BoE governor tells the Today Programme there are two foundations of prosperity - price stability (steady inflation), and financial stability (banks that don’t blow up).

The gap between rich and poor are crucial issues, but these are issues for the government and broader society. They are not the responsibility of the Bank of England.

The BoE’s job is to use its toolkit to prevent another financial crisis, Carney continues:

The people who get hurt when inflation goes up, or banks go down, are the poorest people in society. Without question, time and time again.

Our job is to make sure that doesn’t happen, then the taxpayer doesn’t have to bailout someone in the City.

There are a host of other things that need to happen to growth the economy, and then society has to decide how to distribute the gains of that growth, not the Bank of England.

Updated

Mark Carney: We're worried about frothy consumer debt

Mark Carney, governor of the Bank of England, has just gone a few rounds with John Humphrys on the Today Programme.

Carney has given another hint that UK interest rates could rise “in the coming months”, if the economy continues on its current course.

Q: So what effect will this have on people ladled with debt - we’ve got a debt bubble building?

Carney insists that Britain isn’t experiencing another debt bubble, pointing out that households have deleveraged since the financial crisis.

But, the overall level of debt is now rising (in line with GDP) , and the Bank is increasingly concerned that banks are shifting from responsible lending to reckless lending.

Some lending to consumers is getting “a little frothy and should be addressed”, Carney says sternly.

He cites a “pocket of consumer debt”, including credit card debts, debt for cars and personal loans, which is growing at 10% per year.

Carney says many of these loans are to higher-quality borrowers than before, but still....

We think banks have been giving too much credit for a relatively good economic environment, and not being as disciplined as they should be about their underwriting standards and their pricing on this debt.

In other words, banks aren’t being prudent enough, and making loans that would turn sour if the economy hits trouble.

Carney also rejected calls from former PM Gordon Brown for a new supervisory board to help the Bank handle systemic risks.

He argues that the current system of Bank independence is “incredibly well designed”, letting Carney and his colleagues support financial stability and keep banks supporting the economy.

We have a responsibility to identify risks across the economy — and come on the Today Programme, go round the country, and highlight where there are emerging vulnerabilities.

Hopefully we have powers to deal with them, but at least we have to surface them.

London’s ‘unsustainable’ house price boom is over, and not before time, says Alex Gosling, CEO of online estate agents HouseSimple.com.

The London property market has enjoyed almost a decade of phenomenal growth. But year after year of double digit growth was unsustainable and inevitably going to come to an end at some point. That point looks like now.”

The Government’s reform of the stamp duty bands and the introduction of a second home stamp duty surcharge have hit the London housing market more than any other region.

Brexit fears are also scaring off overseas investors who came to the rescue and supported the London market during the dark years after the financial crash.

Many Londoners will actually be hoping that house prices continue to fall until they reach an affordable level, Gosling continues.

Their wish may well come true.”

This chart from housing expert Neal Hudson shows how the UK housing market has cooled this year.

Updated

Gap between North and South narrows

Nationwide also reports that prices in the North of England are rising faster than in the South.

And not before time, arguably, as the gap has doubled over last 10 years. It now costs an extra £171,000 buy a house in the South of England.

Regional house prices
Regional house prices Photograph: Nationwide

Updated

The real shock isn’t that London house prices are falling, it’s that they rose so high for so long.

So argues Lee James Pendleton, head of independent estate agents James Pendleton. He hopes that a drop in prices will help more people into the market.

“London has been the torchbearer of quite unbelievable growth in recent years but it has been an overvalued market for at least the last three years.

“This shows vendors and agents are becoming more realistic but you’ve got to use an agent that is going to tell you what you need hear. People have got so used to prices going up and the result is too many people have been priced out. London cooling is going to really engage buyers and put us on a better, more stable footing towards the end of the year.

Jonathan Samuels, CEO of property lender, Octane Capital, reckons a correction to London prices was overdue.

“The London property market has been the victim of its own extraordinary success.

Prices in the capital rose to such a level that a correction was always on the cards.

Extreme supply issues within the M25 coupled with always-on demand will mean the London market can only fall so much. “In reality the ongoing correction will be a positive in the longer term. Even by London standards, prices in some areas of the capital had become frankly absurd.

Jeremy Leaf, a north London estate agent, says house prices in London are now falling because they rose beyond the reach of most people.

Plus, potential buyers are also cautious because the Bank of England may raise interest rates soon. Brexit doesn’t help, either.

Leaf says:

The London market is struggling for mainly affordability reasons and it is only those sellers who recognise the changed market conditions that are doing deals.

‘Buyers and sellers are still nervous about prospects for the market in view of lack of perceived progress in Brexit negotiations and concerns about imminent rises in interest rates.’

UK house prices by region
UK house prices by region Photograph: Nationwide

First fall in London house prices since 2009

BREAKING: London house prices have fallen for the first time since the depths of the financial crisis.

Prices in the capital fell by 0.6%, annually, in the last quarter, according to a new survey from the Nationwide building society.

This is the first decline since the third quarter of 2009, and makes London the worst-performing region of the UK (although also still the most expensive).

While London struggled, the East Midlands region showed the strongest growth with prices up 5.1%.

UK house prices by region
UK house prices by region Photograph: Nationwide

Across the UK, Nationwide reports that prices rose by 2.0% per year in September, down from 2.1% in August.

On a monthly basis, prices rose by 0.2% during September, with the average house now costing £210,116 (that’s seasonally adjusted).

Robert Gardner, Nationwide’s chief economist, says house prices across the UK are “converging”.

Annual growth rates in the south of England have moderated towards those prevailing in the rest of the country. London has seen a particularly marked slowdown, with prices falling in annual terms for the first time in eight years, albeit by a modest 0.6%

Consequently, London was the weakest performing region for the first time since 2005.

Gardner believes the squeeze on household incomes is now hitting the housing market:

Low mortgage rates and healthy rates of employment growth are providing some support for demand, but this is being partly offset by pressure on household incomes, which appear to be weighing on confidence. The lack of homes on the market is providing ongoing support to prices.

More to follow....

Updated

The agenda: UK growth figures, Lagarde in London

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Today we get a new, more detailed estimate on UK growth in the second quarter of this year. It’s likely to confirm that GDP rose by a mere 0.3%, and will also show how business investment held up during the quarter.

The Office for National Statistics will also be announcing some chunky revisions to the UK’s national accounts.

They’re expected to show that households are saving more than previously thought, but the balance of payments could show an even bigger deficit than before.

Also, the Bank of England will be holding the second day of its conference into central bank independence. You can follow it here.

Yesterday’s event heard plenty of warnings that rising populism, and public concerns over unorthodox stimulus programmes, risk undermining central banks.

City economists will also be watching out for the latest eurozone inflation data; the eurozone CPI may rise to 1.6% from 1.5%.

Here’s the agenda:

  • 9.30am BST: Third estimate of UK GDP in Q2 2017
  • 10am BST: Eurozone inflation figures for September
  • 11.30am: IMF chief Christine Lagarde gives a keynote speech at the Bank of England’s conference on independence

Updated

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