As we approach the middle of the final quarter of 2012, one has to say that the economic outlook is still a gloomy one – even for a born optimist such as myself. In fact as far back as July 2009, my Gibraltar Magazine column article was titled Green Shoots. Had I known three years ago what we all know now, maybe I wouldn't have been so keen to call time on the crisis, but life seldom turns out quite as we expect, does it? And in the financial world, that has never been truer than today.
But given my "glass is half full, not half empty" sense of optimism, are there any signs of recovery one can point to as 2012 races towards 2013? Firstly, I should acknowledge that for many, including here in Gibraltar, the year could end badly as more jobs losses are announced and companies continue to struggle or even fail altogether. This is especially true across the border in Spain where many Gibraltarians have been left nursing hefty mortgage payments on property worth considerably less than when purchased.
Sad to report, negative equity – once a peculiarly British phenomenon – has become far too common in Spain. The new government is struggling with an ever deepening recession and chronic unemployment. It ends 2012 faced with providing financial aid not just to its heavily indebted banking sector but to the autonomous regions themselves. The second half of the year has been dominated by talk of an EU bailout and we have seen some civil disorder in the streets.
But away from Spain, are there genuine reasons to be hopeful? I suggest that there are – in certain specific areas – and the hope has to be that these early signs will prove to be long lasting and will manifest themselves in other parts of the economy, leading to an overall change of mood and ultimately recovery.
Consider the situation in the place where it all started to go wrong – the US. There are some real signs of progress and not just anecdotal ones or hyperbole in advance of November's presidential election. The overall unemployment numbers, whilst still far too high, have recently stabilised. More and more listed companies have been reporting good year-end figures and, as a result, some elements of the stock market are testing levels not seen for several years.
All well and good but the US is such a vast economy and is still the only true global superpower in financial terms. What happens across the Atlantic certainly affects us here but we must face the fact that it's the situation in Europe that should concern us most. It is upon Europe's recovery, or at least partial recovery, that we all depend.
Of course in Gibraltar we rely on the financial health of two entirely separate economies for our well-being. I touched on the situation in Spain earlier, but let's now turn to the UK because, for many Gibraltarians, the state of the British economy has a more significant effect on their daily lives. As part of the sterling area, we are dependent on Britain when considering the all-important exchange rate, especially against the euro. Price rises on imported goods such as fuel and, of course, food, are all largely out of our control.
UK government policy is currently focused on reducing the eye-popping deficit while at the same time attempting to stimulate growth and keep inflation under control. It is a very tricky balancing act. The deficit is still huge but is moving on a positive track.
Inflation is now line with expectations and whilst GDP, my favourite measure, is still negative (i.e. in recession), it is marginal and in fact the figure was recently revised in the right direction. All this is somewhat academic but the hope is that by stimulating growth, more jobs will be created leading to higher tax receipts and eventually a permanent reduction to the huge deficit.
In the real economy, companies are still laying off staff and stories of this or that high profile corporate failure still appear in the news with gruesome regularity. At the same time however, others are taking on staff. The motor and retail industries are prime examples recently. There are also real signs that banks are starting to lend again, even if very selectively, which is long overdue given the lengths to which the government has gone to persuade or cajole banks to lend – from quantitative easing and maintaining interest rates at very low levels through to threats of punitive action.
It's in the UK property market that we can see real, tangible, signs of recovery – fragile though any upturn may be. The truth is that some property sectors are booming; the smarter areas in central London are still doing as well as ever but most British people don't live in Knightsbridge or Mayfair. What about the rest of the country?
Several major house building firms have recently announced good year-end figures. Considering the reasons why, leads us to one of the easiest comparisons one can make between the UK and Spain – one of great interest to us here in Gibraltar. The two countries differ markedly when considering residential property. Put simply, in the UK there are just not enough houses to go round. Net immigration and constantly increasing demand from the young and first-time buyers mean that this sector is relatively buoyant. Moreover, a number of the house builders are sitting on undeveloped land. Given the chance of increasing bank lending – both to the developers to build houses and to the individuals who want to buy them, the position is likely to become ever more sustainable. And this leads to other forms of spending such as expenditure on white goods, furniture and so on.
In Spain – and indeed many other countries in Europe – the opposite applies. There is chronic over supply combined with no appetite from the banks to lend to the property market. Hence demand is drying up. The situation in both countries could hardly be more different but of course Britain is a nation of home owners – certainly there has been a massive jolt in the last few years but has the national psyche really be changed for ever? I doubt it.
Some consider it a pity then that the UK government is planning such sweeping changes from next year relating to British residential properties that are owned by offshore companies. Aimed at clamping down on what they see as abuse of favourable tax treatment, increased stamp duty has been announced where property is valued at £2m or more and for the first time capital gains tax will apply to properties owned by such companies. We await final details but anyone in this position should seek advice urgently to see whether they are affected.
These new changes may impact negatively on foreign purchasers of UK property who might now think again if the previous fiscal benefits attached to such investment will no longer apply. I suggest though that looking at the wider picture, UK residential property for domestic use – that is where individuals are UK resident and looking to occupy the property themselves or for letting out to others – could well be one of the lynchpins of the putative economic recovery for which we are all so desperate.
Perhaps I might be allowed to misquote Winston Churchill. Are we seeing the end of the financial crisis? No. Not even the beginning of the end. But we might, just might, be witnessing the end of the beginning – at least in the UK. Let's hope so for our all sakes.
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