Is economics a science? Many academics in the field would say "yes", and the way that the subject is taught today is based on this viewpoint.
The problem is that businesses and consumers have a nasty habit of not being consistent. And this inconsistency makes a model-based approach to economics difficult. One of the best questions asked about the Great Financial Crisis, by the Queen I think, was why no one had seen it coming. While not narrowly true – there were forecasters out there warning of trouble ahead – the thrust was correct. Economic forecasters find it difficult to pinpoint inflection points. And this is not surprising as changes can be subtle, happening over long periods of time, or reflect sudden shifts in sentiments brought about by incidents that are huge (Covid, oil crisis, war) or apparently trivial (the butterfly effect).
One of the changes that has happened over a long period of time is the growth in university education. This is changing the nature of British society, including political allegiances, with long run consequences that are still evolving. The UK has a world-leading university sector and now over half of young adults go into tertiary education. One question this raises: is this sensible? The answer is generally yes – certainly for the individual. The UK has one of the highest remuneration differences between those with university degrees and those with no tertiary qualification. The problem is that for the economy, the answer may be different. Perhaps this was less evident when labour could be brought in from other EU countries – but it is different now. The remodelling of the labour market post-Brexit and Covid will be interesting to see – and will challenge economic forecasts.
The broadening of education opportunities has also been reflected in sterling credit markets. Last month RLAM helped fund, through a bond issue, the provision of student accommodation at the University of Essex. The project will deliver an extra 1,262 rooms and is expected to come on-line in September 2023. As the sole owner of the £65m fixed rate tranche we were able to work closely with the issuer to ensure that our respective requirements were met. Our exposure to education is actually quite wide, covering student accommodation, schools, student loans and direct university funding. None of these opportunities were available 10 years ago and reflects the dynamic nature of credit markets.
Cash and government bonds
UK GDP grew only 0.1% in July, below the consensus of 0.5%. Production output rose, helped by the reopening of an oil field, but construction fell again and services were broadly flat. Within services, ‘arts, entertainment and recreation’ were strong driven by re-openings, whilst there was a drop in legal and real estate activities, reflecting the partial end to the Stamp Duty holiday period. Consumer-facing services are still 6.7% below pre-pandemic levels according to the ONS, still suggesting significant room for growth as consumer behaviour normalises further. Sterling strengthened a bit on the week.
In the euro area, the European Central Bank agreed to slow the pace of asset purchases but President Lagarde differentiated this from tapering. In their eyes, “favourable financing conditions” can now be maintained by a slower (“moderately lower”) pace of asset purchases than “in the previous two quarters”.
Bond markets were modestly weaker over the last seven days. US treasury 10-year yields moved up to 1.35% with the UK equivalents hitting 0.75%. The political outlook in Germany remains uncertain with the ruling CDU party slipping in the polls; 10-year yields reflected the possibility of deadlock or a left of centre coalition by moving to -0.33%.
Investment grade credit spreads held in at their year-to-date lows. The summer lull has come to an end with strong issuance in markets. Demand remains strong, as indicated by levels of subscription for new issues. We found ourselves priced out of several issues last week – where the initial price talk was attractive but the end level much less so. It is important to keep discipline in these market conditions – so our liquidity across sterling strategies moved a bit higher last week.
High yield spreads have fallen sharply in recent weeks and all-in financing costs remain very low. Again, we remain picky with fewer new issue purchases being undertaken than expected.
On a different note, I was gripped by the tennis on Saturday night – what a great outcome for Emma Raducanu. Let’s hope that we don’t go into over-hype and just give her space to adjust. That said, she seems a very composed person: to give such an interview after pulling off one of the greatest sporting achievements was amazing. Given her recent success in A Level Economics I am sure she is aware of how shocks can change lives and spending patterns.
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are the author’s own and do not constitute investment advice.