Sometimes it's hard to know what matters
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
What are we to make of Donald Trump? People find it easy to form opinions about his rhetoric, or his policy choices, but what about his likely impact on the global economy?
The new US president signed a stack of executive orders during his first day in office yesterday. Tariffs are coming as soon as February 1st, and will likely include a 25% levy on goods from Mexico and Canada and potentially another 10% on Chinese products. One order halted as much as $300bn in green infrastructure funding, another rescinded a Biden-era order implementing guardrails on the development of Artificial Intelligence. Overhauls of all sorts of policies spanning immigration, taxes and regulation may or may not be coming.
Investors aren't sure what to make of it all. The Mexican Peso had a predictably volatile day, but the S&P 500 closed up just 0.9%. The Nasdaq gained 0.6%. The Vix Index, a metric that enables investors to bet on volatility in US stocks, actually fell yesterday. The Move, an equivalent index for US government bonds, is trading within its usual band.
The FT's Robert Armstrong has a good piece on exactly why we might be seeing so little volatility in US markets, but there is a broader point worth marking, which is that though uncertainty appears to be high, and threats to growth appear to be proliferating, it's actually getting harder to know which events will have any meaningful impacts on the real economy.
Economic consequences
The team and I are putting the finishing touches on The Wealth Report 2025, which involves plenty of looking backwards and forwards to parse what might influence real estate markets in the coming years. One economist recently asked me to go back twelve months - what if we'd known during January 2024 that the world's main shipping route through the Red Sea would be totally disrupted and Israel and Iranian proxies would begin exchanging missile fire? How large might the subsequent spike in oil prices be? And what might the collapse of global supply chains do to inflation?
In reality, not a lot. Brent crude peaked at $81, up from $71 before the missile crisis and far below predictions of a surge to more than $100. Increased global production and slowing demand in China conspired to ensure what was a significant political event had few economic consequences - at least not at a global level.
"These risks don't happen in isolation, so while the world has become more unpredictable and more uncertain, not all of those risks matter from a macro perspective," the economist told me. "The challenge is to try and work out which bits of uncertainty really matter from a global macro perspective and which of them matter from a political perspective but don't really translate to the macro."
Donald Trump is clearly politically very important, but beyond that his likely impact remains unclear. Economists can't seem to agree whether tariffs will be inflationary or deflationary, but there does appear to be consensus that deporting a large number of workers while cutting taxes will be inflationary. Yet for now, at least, it appears that strong earnings from US companies in the latter half of the year and the prospect of growth is the bigger story. Who is to say that won't continue?
A reassessment
Twelve days ago a global selloff in government bonds had prompted a spike in gilt yields. Swap rates, instruments used by the lenders to price mortgages, followed suit, and we were weighing the implications for the property market.
Well, gilt yields returned to their pre-selloff level yesterday. Reuters put that down to relief that Trump's plans for tariffs will be more moderate than initially feared, but there has also been a broader reassessment of the UK rates outlook in the wake of weak retail sales figures. Unemployment also ticked up in data released yesterday.
Bank of England Monetary Policy Committee member Alan Taylor this week said he expected four rate cuts through this year, which was twice as many as markets were pricing at the time. While a few of the major lenders have repriced since the onset of the bond market volatility, others - most notably Nationwide - have so far sat tight. That looks to have been a good move. The five year SONIA swap rate eased to 4% earlier this week, down from 4.3% last week.
To say this will all come as a relief to the chancellor would be an understatement. Her economic strategy appears back on track, having been in tatters just a fortnight ago, and the UK's place as a beacon of relative stability is back in the headlines. The UK was ranked the second most important market for international investment, beaten only by America, in a PwC survey of 4,701 chief executives in 109 countries published by the Times on Monday.
"The UK’s relative stability at a time of instability should not be underestimated, nor should its strength in key sectors including technology,” PwC senior partner Marco Amitrano tells the paper.
A plan for growth
Labour's first Budget was underwhelming for a party that had just won an enormous majority, but recent announcements suggest it is serious about growth, even if it has so far proved elusive.
Ministers are set to publicly signal support for a long-sought third runway at Heathrow, sign off on plans to bring the second strip at Gatwick into full-time use, and allow an increase in the capacity at Luton Airport, writes Bloomberg. Meanwhile the party is to strip environmental quangos of their powers to delay major housebuilding and infrastructure projects, according to this morning's Times.
"Regulators will no longer be able to demand that developers mitigate the environmental damage caused by new buildings before construction can start," writes Oliver Wright. "Instead, they will be required to pay into a new national “nature restoration” fund to “offset” any potential damage, and continue with projects without delays."
This follows last week's news that regulators are looking at loosening rules to boost mortgage lending the borrowers at the foot of the property ladder. The Bank of England appears to be on board.
In other news...
Tom Bill on uncertainty and opportunity in the UK country homes market.