Turning points in economic and financial cycles are always impossible to spot until they are well behind us, but these past few days do feel quite different from a month or so ago.
And if that is right, then come the spring and summer they will feel more different still.
Take inflation. It’s coming down. We get new figures next week, but the question then is really how fast they will be falling and whether we are on track, as the Institute for Fiscal Studies expects, to getting the consumer price index down below 4 per cent by the end of the year and below the 2 per cent target by the second quarter of 2024.
It acknowledges that this is much lower than the Bank of England expects, but notes that it is closer to economists’ consensus.
Take house prices. The market is still soft, but both Nationwide and Halifax report that house prices nudged up a bit in October.
Bumps in the road: The proposition that we, and the rest of the developed world, seem to have passed a turning point surely makes sense
I wouldn’t rule out some further falls, but clearly they haven’t crashed, and the end of the decline looks in sight.
Pantheon Macroeconomics think that the turning point will be in the spring and that they will climb by about 5 per cent in the second half of next year. That would bring them close to the previous all-time peak of autumn 2022.
Take long-term interest rates. The yield on 10-year gilts is now around 4.25 per cent, against over 4.6 per cent three weeks ago and 4.75 per cent in August. That mirrors the corresponding rate on US treasuries, which hit 5 per cent in October but now yield close to 4.5 per cent.
We have not yet had any signals of lower short-term rates from the Federal Reserve, the Bank of England or the European Central Bank, but barring some catastrophe they look to have reached the peak. So the question is when the first cuts will start to come through, presumably early next year but conceivably even sooner.
You can look at other indicators and pick out a similar pattern.
For example, oil prices are well off their highs, despite the troubling news from Ukraine and the Middle East. Brent crude is $80 a barrel, down from $95 a barrel a year ago and over $90 a barrel last month. Wheat prices have fallen steadily this year and are actually lower than they were on the eve of Russia’s invasion of Ukraine.
And if you want a somewhat esoteric measure of the mood of the markets, there is the so-called ‘fear index’. That’s the VIX on the Chicago Board Options Exchange, and it measures the expectations of volatility in US share prices. It shot up on the news of the conflict in Gaza but now has fallen back to normal levels.
Markets may be deluded, but for the moment they are calm.
Now think forward to next spring and summer. We will get our Autumn Statement in 10 days’ time and don’t look for much cheer there. We have to get through the winter and my own expectation is that rising real incomes – the combination of lower inflation and meaty increases in pay – will support consumption enough to stop there being a recession this year.
September GDP numbers were solid. By the Budget in March and onwards we will all come to realise that real growth has resumed. If that inflation outlook from the IFS is anywhere near right, it will be jolly difficult for the Bank of England not to be cutting interest rates fast.
If house prices start rising, that too will underpin consumption.
As for the Government’s finances, the combination of lower debt service costs and continuing decent increases in tax revenues will mean that it can ease the squeeze without frightening the markets. Of course, there are dangers, and of course, there will be the structural problems of the UK economy which will need to be tackled.
The job market, which has been very strong, may soften a bit. So it would be silly to be Panglossian, either about the outlook next year for the UK, or indeed for the world economy. As we have learnt to our cost, a lot can go wrong.
But the proposition that we, and the rest of the developed world, seem to have passed a turning point surely makes sense.
It will take some months to realise this because perceptions always lag reality. However the combination of rising real incomes, inflation down to 2 per cent, and house prices climbing back towards their previous peak, should generate a much more positive mood than we have now.
We know there is an economic cycle and we seem unable to escape from it.
But now, we are on the up.
