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Investment view

It seems appropriate to spend a little time considering the attitude of consumers in the run up to Christmas. It seems that we in this country have lost none of our propensity to spend while US consumers find themselves very much in the grip of the recession. There should be no surprises in the extent of this divide. Jobless figures in the US have been shooting skywards so, aside from the disruption to confidence that the terrorist attacks on September 11 have had, there is that unsettling prospect of potential unemployment.

In the UK, the unemployment queue hardly moved during November, despite the fact that the world economy is slowing. Indeed, all the indications are that Britain has the healthiest economy of all the G7 nations. But our economic performance is not so strong to justify sales growth, that is now as robust as at any time since the Lawson boom of the late 1980s. Why are we planning the consumer Christmas of all time?

There are definite parallels to be drawn with the late 1980s. The Lawson boom followed a period of monetary easing brought about by fears that the 1987 stockmarket collapse presaged something more serious in the world economy. Cheaper money helped fuel a house price boom. Of course, back in the 1980s, it was exacerbated by the imprudent early announcement that tax relief on joint mortgages was to end. The rush of couples to buy their own homes pushed house prices to an unsustainable peak in the summer of 1989. There was considerable carnage afterwards.

In the UK, it seems we value home ownership above all else. People, believing they were far better off because the value of their main asset was roaring away, spent as if possessed. Why not? They were only diminishing part of their perceived wealth as a consequence of the rapid rise in house prices. Much the same thing seems to be happening today. House price inflation is continuing, all be it at a less frenetic pace than that of 12 or so years ago. Cheap money has undoubtedly helped promote demand for housing, while the demographic shift that is still continuing has led to a building boom of spectacular proportions.

Not all buyers are taking that first step in home ownership or trading up. The buy-to-let market has prospered, with many disillusioned stockmarket investors deciding that bricks and mortar are a better home for their savings than perfidious equities. Even so, people are clearly more relaxed about spending because they can see property rising in value and compensating for poorer returns from equity investment.

There was a similar experience in the US as the technology boom took hold. Many US citizens spent more than they were earning on the basis that the stockmarket was doing their saving for them. But one day the chickens tend to come home to roost. The problem in this country is whether the accelerating growth of retail spending can be sustained.

Given that inflation is so little of a problem at present, we can be forgiven for not worrying too much when we learn that the high street is having such a bonanza. But there is another side to this. High retail sales growth, coupled with continuing house price inflation, will almost certainly put the brake on the monetary policy committee when it comes to reaching a decision on interest rates. Bear in mind that, following the latest cut in the US, the cost of money in this country is now more than double that on the other side of the Atlantic. With the prospect of our membership of the euro likely to be more of a talking point in the months ahead, where we sit in the interest rate cycle will come under the microscope. The MPC cannot ignore what happens to the value of our homes or our behaviour in the high street. Just remember that when you buy that last-minute present.


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