Roger Bootle: It's all about momentum now

The question of whether or not the UK falls back into a double dip is irrelevant – the critical factor is whether the economy can sustain any form of growth momentum, says leading economist Roger Bootle.

Bootle, founder and managing director of Capital Economics, told Citywire that the ‘natural bounce-back from extreme weakness’ had been no great surprise but had been brought about by the businesses rebuilding stock and inventory levels as well as ultra-low levels of interest rates.

‘All of that was bound to bring momentum, given the levels of balance sheet weakness,’ he said. ‘I don’t think whether or not we have a double dip is significant and it is certainly not helpful to the debate.

‘If GDP [gross domestic product] was to fall by 0.1% in the next quarter, people might call that a double dip but then UK output might grow by 5% in the next quarter. The question is: will growth gather momentum?’

Bootle said he would be surprised if UK output fell back into a slump but he foresaw a range of temporary factors hampering growth. ‘Inflation will stay very low for the UK and around the developed world and [growth] will be held up by temporary factors such as a push on prices from devaluation. After that we will see the return of inflation.’

On the stock market Bootle was wary of government bonds, or gilts. Gilt prices have been pushed to record highs on the back of government buy-backs which aim to inject cash into the economy. A flight to safety by investors has further raised gilt prices and therefore depressed yields to such an extent that leading investors have predicted a crash next year. 

Bootle said: ‘Over the medium term government bonds would appear bad value. When things return to relative normality investors won’t put up with 3% – but we are not there yet. I suspect bond yields will remain the same or go even lower.’

Bootle described the current bond environment as a ‘dangerous market’ for investors because people ‘don’t know what they are getting into’. He said: ‘People will have to rush to the exit pretty smartly at some point.’

By contrast, equities, or shares, were ‘reasonable value’ over the medium term, Bootle said. although, he cautioned that this could change if economic conditions worsened.

Bootle has stuck consistently to his view that interest rates will remain at 1% or below for the next five years in the UK.

‘If I’m right, 3% on 10-year bonds does not look so bad, but it is all about how long this short-term low growth period lasts. The idea of holding gilts at those yields for sustained periods looks wrong.’

However, he added: ‘The trouble is, in the immediate future, we just don’t know how long the low growth/low inflation environment will last.’

Bootle thinks some selective exposure to commercial property might be a better bet. ‘It certainly looks attractive compared to gilts – but you need to be very careful in what you buy.’