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Investment view

There was a somewhat disturbing headline in the financial press last week. It was along the lines of Market rises on lack of bad news. It is a sign of how desperate we have all become that we need the reassurance that no companies have gone bust or that profit warnings are not worse than we expected to produce a justification for buying. Not that I am complaining. Rising share prices are what we are all after.

As it happens, there was some good news around last week. Growth in the UK accelerated in the third quarter. We should not be too surprised at that. First, only a small part of the period might have been impacted by the events of September 11. We were not, in any event, affected in quite the same way that America was by the attacks but, with any fall-off in activity confined to less than three weeks, it would not have been too significant a consideration. Second, the foot and mouth problem certainly dampened economic activity in the second quarter.

Looking through the detail of the figures produced, you can see that there was also the benefit of a rebound in manufacturing output or, perhaps more correctly, a slowing in its decline. The second quarter of the current year was dire for manufacturing industry. Production figures for July and August had already suggested that there was something of a recovery and while overall another small decline was reported for the third quarter, it had little overall effect on the figures produced. The main problem seems to be that the service sector was continuing to drive economic growth during the third quarter. Why is this a problem, you may well ask? This is one area of activity where a slowdown seems inevitable. Software groups in particular are announcing profit warnings on an almost daily basis. Business is clearly battening down the hatches. Whatever the consumer may be doing, the commercial world is preparing itself for the worst.

Of course, better than expected GDP growth figures are not necessarily be a good thing when it comes to determining the level of interest rates. A rising growth trend may well deter the monetary policy committee of the Bank of England from initiating another rate cut. They have been just a little reluctant to bring interest rates down too far, notwithstanding the fact that we have dearer money than in continental Europe and the US because of the robust nature of the housing market. This may be about to change and that may be no bad thing for the economy overall, as it happens.

Wilson Connolly released a profit warning last week, declaring that the results for the year due to end in December will be below market expectations. It would seem that there is no apparent sign of a softening in prices but the number of reservations it receives from potential purchasers has fallen significantly. This means they will not complete on as many transactions as they expected. The situation was sufficiently serious for the chief executive to resign.

There are plenty who think that an overheating property market had only one way to go from this point in time. Despite some housebuilders saying they were not yet experiencing a slowdown, depressed economic activity inevitably translates into lower prices for residential property. But that in turn makes it easier for the Bank of England to decide to cut rates.

It will all be about interest rates for the rest of this year, I fear. Already the Fed has trimmed to the point where manoeuvrability is limited. The ECB is a more reluctant member of this club. But as corporate and economic news worsens, so pressure to increase the stimulus through monetary policy intensifies. Good news for those with a mortgage but tough if you rely on deposit interest for your income. Time to think about committing that cash – somewhere.


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