Apart from another disappointing set of inflation figures, the economic situation is more encouraging than most of us dared to believe. And it is certainly more encouraging than data from the United States, which at this stage looks to be in greater danger of going into a double dip recession than we are.
UK figures on retail sales, public debt, business confidence and mortgage lending issued this week all beat expectations.
Retail sales rose 1.1% in July. It is probably too early for people to be buying ahead of the VAT increase in January, although that factor will influence the figures increasingly as we approach year end.
Public borrowing fell sharply from £6.1 billion in July to £3.8 billion in the same month this year. While this is still pretty grim considering that the government usually records a surplus in July, it is at least a lengthy step in the right direction. Particularly encouraging is that income from corporate tax rose by 38% year on year and monthly tax receipts overall were 10.5% ahead.
The indications are that the economy is not dropping back yet and the early omens for third quarter growth are good. The word early does have to be stressed, though. We are only half way through the quarter and these figures represent just one third of it.
Nor do they cover the fact that public borrowing is still horrendous. Even excluding the cost of the bank bailout, which we should recoup in due course, total government debt will top £1 trillion before the financial year is out. It costs nearly £4 billion a month just to pay the interest on it, a bill that will rise as interest rates edge upwards.
The CBI industrial trends survey shows growing confidence in order books and a rise in export orders. As with all the other data, a note of caution is wise. We still have more manufacturers taking a pessimistic view than are reporting better figures. It is just that we are moving in the right direction.
Mortgage lending rose in July for the third consecutive month to reach its highest level for a year. A total of £13.6 billion was dished out by members of the Council of Mortgage Lenders, 5% more than in June but still below the July 2009 level.
Overall, then, the figures are not great but they do show an improving trend, which is more than can be said for manufacturing and employment figures in the US. Manufacturing in the heartland of Pennsylvania, New Jersey and Delaware contracted in July for the first time in 12 months while the number of people claiming unemployment benefit for the first time across the nation hit its highest level since November.
One glimmer of hope comes from computer maker Dell, which reported higher than expected sales and profits in the second quarter. Rival Hewlett Packard also reported better figures, although these had already been foreshadowed a couple of weeks ago.
The welcome news from these two giants came after the New York market closed and too late to prevent shares dropping heavily on both sides of the Atlantic on Thursday. Their influence on share prices will be limited by the fact that they cover the period ending in June, while the bad US economic news reflects what happened in July.
Shares are likely to continue to move sideways while the confusion continues, with sharp falls on the bad news and slower recoveries during the lulls. I would still advise buying shares with good yields every time the market dips.
You Can Bank On It...
Fixed rate mortgages are rising--lousy news if you are a home buyer but great news for the banks. According to personal website Moneyfacts, the rate at which banks borrow to fund mortgages is at an all time low while the gap compared with what they lend at is at an all-time high.
This is not quite as black and white as it looks. Interest rates will rise at some point over the next two years and the fixed mortgage rate reflects this. Also, two-year fixed rates are still at a comparatively low level of 4.55%.
However, we do have further evidence here that the real world of interest rates is increasingly divorced from the Bank of England’s 0.5% base rate.
We also have further evidence that whenever the banks get into a mess they rapidly rebuild their profits. Once again it is the man or woman in the street who bears the most pain.
Bank shares remain at seriously depressed levels. They have a long way to go to recover their former levels but recover they will. Every portfolio should have at least one bank in it.
… And Build On It
Despite the looming government cuts, you should also include in your portfolio at least one company providing building and support services to the public sector. Despite its popularity with parties of all hues, PFI, PPP and other arrangements under which the private sector picks up costs now in return for payments later is a growing time bomb.
These schemes will cost billions of guaranteed income for the private sector over the next 30 years as the long term costs far outweigh the short term savings. Cash strapped chancellors will be unable to bring this gravy train to a halt. Indeed, they will be forced to rely even more heavily on the private sector for those projects that do go through, thus exacerbating the problem.
Rodney Hobson is a private investor writing about his own portfolio. The opinions expressed in this column are those of the individual, and not of Morningstar, and should not be construed as financial advice.
