Bill Jamieson: Stock market joy challenges the naysayers

It's looking grim '“ isn't it? The economy as we enter the New Year has seldom looked so dull. Except of course last year, when it also looked very dull. Might the Gloomsters be proved wrong in 2018?

The FTSE 100 Index closed on Friday up 7.7 per cent on the level 12 months ago. Picture: Getty Images
The FTSE 100 Index closed on Friday up 7.7 per cent on the level 12 months ago. Picture: Getty Images
The FTSE 100 Index closed on Friday up 7.7 per cent on the level 12 months ago. Picture: Getty Images

As humans we are wired as a survival instinct to pay more attention to threats and challenges than to more sanguine news that’s around. We certainly have plenty of threats and challenges to work on now, from bleak growth forecasts to falling real incomes. And as if those weren’t enough, SNP Westminster leader Ian Blackford has called for joint action to meet the “catastrophic damage” of an “extreme” Brexit.

Ring in the New Year? Better, surely, to put mufflers on the bells.

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However, all this leaves the naysayers having to explain some odd and puzzling phenomena.

For example, if our prospects are so poor, why has the stock market not fallen and instead gone on to hit all-time highs?

If the economy here is so under threat, why are house prices in Scotland not only higher than a year ago, but sales growth here is outperforming the rest of the UK?

And if consumer confidence is so weak, why was the ONS able to report on retail sales that “the underlying pattern remains one of growth”, with sales in the three months to November up 0.8 per cent on the previous three months and up 1.6 per cent on the same period a year ago?

Freezing temperatures and snow-covered roads have darkened the national mood. But on certain key measures of economic behaviour and business confidence, the picture is by no means one of unalloyed foreboding.

Take the stock market. Last week after the Christmas break it went on to hit record levels. The most quoted barometer, the FTSE 100 Index, climbed to 7,668, up by more than 500 points or 7.7 per cent on the level 12 months ago. Add in three per cent dividend income, and most investors will have enjoyed a 10 per cent total return over 2017. Lest this be seen as a one-off “freak” period, the index is now up 25 per cent over the past two years.

Nor has investor confidence been confined to the globe-straddling mega-stocks of the top 100. The more domestic-facing FTSE 250 Index also hit new highs last week, outperforming the FTSE 100, and is now standing 14 per cent up on a year ago.

Sceptics will argue that this tells us little about the “real economy”; that share prices are a poor guide; and that the movements of stock markets have little effect on physical investment or household behaviour.

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It’s certainly true that share prices can seem to bear little relation to current reality. Their movements are often fickle and subject to changes in central bank policy and international events. Such fluctuations need to be treated with caution; even a market “correction” may not dent underlying confidence that much.

But that said, stock market indices can be taken as a rough and ready guide to investor confidence in the outlook 12 to 18 months ahead. Upward movements, particularly when sustained, as has been the case here, can work to boost ISA and pension savings and lift household confidence, while businesses, private as well as quoted, are encouraged to expand as the market assigns greater value to their earnings prospects and underlying worth.

Share prices have been helped by the fall in the pound, which has worked to boost overseas earnings of exporting companies when translated into sterling. At the same time, the lower pound has made investment in UK companies look more attractive for overseas buyers. And at home, record employment has helped sustain consumer demand.

A similar though muted story can be seen in the movement of house prices. We were warned often enough in the wake of the Brexit vote that house prices would be hit. But in the event, the latest Registers of Scotland report earlier this month showed the average price of a property in Scotland in October was up 2.8 per cent at £143,544 on a year ago, with 29 out of 32 local authorities recording an increase.

Average prices have been steadily increasing each month since March 2016, when compared with the same month of the previous year. The average price in Glasgow is up by 4.6 per cent and in Edinburgh by 8.5 per cent.

Meanwhile, the volume of residential sales in Scotland in August was up 7.4 per cent on August 2016, compared with a fall in sales volumes of 12 per cent in England.

Seldom has the outlook been so lacklustre for retail sales and consumer spending. A continuing squeeze on real incomes due to inflation, coupled with a slowdown in employment growth, has dulled the outlook for the high street. Consumer spending in the approach to Christmas was the weakest since the first three months of 2012.

But in spite of this, many retail outlets in Scotland reported buoyant post-Christmas trading. And it is worth noting the latest summary from the ONS: “The underlying pattern in the retail industry in November 2017, as suggested by the three-month on three-month measure, remains one of growth,” it noted, “with the quantity bought increasing by 0.8 per cent. When compared with October 2017, the quantity bought in November 2017 increased by 1.1 per cent, with household goods stores showing strong growth at 2.9 per cent”.

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As for online sales, average weekly online spending in November has climbed 10.2 per cent on a year ago to £1.2 billion, with “sofa shopping” on our tablets and smartphones now accounting for 17 per cent of all retail spending.

All this may offer little comfort for cash-strapped households. But there are sound reasons to believe 2018 will not be as bleak as many predict. Tax changes effective in April should help relieve the pressure on low income households. We are now likely to be past the peak of inflation while the Bank of England has indicated only modest further rises in interest rates in the year ahead.

Annual GDP growth has already been revised up from 1.5 per cent to 1.7 per cent, with independent forecasters suggesting an out-turn of 1.8 per cent growth is likely for 2017 as a whole.

And the global economy looks to be firing on all cylinders – a prospect that should help the UK in the year ahead. For these reasons, the forecasts of the Office for Budget Responsibility and our own Scottish Fiscal Commission may well be in need of an uplift 12 months from now.