‘Economic Preparation in Unpredictable Times’ with BW: Workplace Experts
BW: Workplace Experts hosted attendees from across the construction and built environment sector for ‘Economic Preparation in Unpredictable Times’, a seminar by Roger Martin-Fagg, a Behavioural Economist who combines insight into the financial and policy worlds with management strategy to deliver both an economic outlook and insights into what organisations should do to prepare.
Referencing David Kahneman’s ground-breaking bestseller ‘Thinking, Fast and Slow’ Roger described how human beings aren’t naturally rational, with 80% of their time being instinctive and just 20% being rational. So, with such a vast percentage of human nature instinctive, what affect does this have on our economic mindsets?
- Anchoring: we use the first bit of information we receive to make subsequent judgements.
- Rule of thumb: a rough and ready workable approach based on little or no information.
- Confirmation bias: we seek out information which confirms our beliefs. If the research doesn’t support our opinion, we then question the accuracy of the opposing information. In the digital era that we are living in, the ability to easily join groups of like-minded people on social media platforms, further our confirmation bias.
We value loss 2.5 times more than gains, so no wonder the Government finds it difficult to change any kind of benefit. This also explains why some people find it difficult to sell their house: they see an offer as a loss.
The influence of fear
A sense of fear that is created by feedback, whether through government officials, the media or other influential voices, adds to economic uncertainty with mortgage credit and house prices. Shock, for example a potential no deal Brexit, causes the sterling to collapse – this causes house prices to fall, wealth falls, people are fearful so spend less and save more. This then causes retail sales to collapse and banks reducing mortgage lending, so money supply slows.
Short run economic activity is driven by the flow of spending. Money plus velocity equals nominal GDP. Today’s money supply determines nominal GDP within two years.
The main indicators of velocity:
- The Purchasing Managers Index (PMI looks ahead one to two months)
- Retail sales which are coincident with GDP
- Relative exchange rate
- Price of oil
- Large companies increasing their cash balances usually by delaying payments to smaller companies
- Longer leading composite indicator
All indicators point to a sharp slowdown and possibly a recession in the next 18 months.
Roger concludes that the British disease is real estate, as the British have more of their wealth tied up in real estate than any other G7 country; 51 % of its net worth, whereas Germany is 26%, Japan 35%, France is 42% and Canada is 39%. Since 1972 the British have viewed a house as a financial asset and its perceived value is a big influence on confidence and retail spending. 80% of British bank lending is for real estate, with banks tightening their lending criteria in June 2018.
For further information please contact Anna King.