We are proud of the passionate team of experts we have at 4most and we would like to share their motivations and thoughts on their specialist areas with you. The second in our series of ‘120 Seconds’, a question and answer session, is with Keith Church, Head of Economic Modelling.
1. What do you find interesting about Economics?
When I first started working in economics, it was because I wanted to understand and model how the economy worked at a macroeconomic level. Understanding the behaviour that causes booms and busts, is still central to what I do – but working in credit risk during the global financial crisis brought home to me that the economy is made up of individuals whose experiences vary considerably. Uncovering what drives these experiences is crucial if you want to identify which customers might thrive and who may struggle.
2. What are the key risks facing the UK economy at the moment?
Brexit – this is the obvious one of course. Regardless of the immediate outcome, the need to agree on a long-term relationship with the EU will still have to be tackled and the effects are expected to last for a long time. If the current uncertainty is lifted, there is potential for a rebound in business investment and productivity.
UK household finances – although they are in good shape at a macroeconomic level and there are slightly fewer households living ‘month-to-month’, overall there are still too many. Loss of income would have a significant impact here.
Employment – the UK has been very successful in raising the minimum wage while maintaining job growth but there is a possibility that this could become unsustainable and more employers operating on tight margins may go bust.
Commercial real estate – conditions on the high street remain challenging and it is unclear if property valuations fully reflect the downward pressure on rents that this implies.
3. Why is it important to have robust economic models?
Everyone that produces a forecast has a model, even if it is only stored in their head! Writing down your model encourages scrutiny and challenge. No model is perfect, but a good model will help you understand if the world is evolving as you expect and whether the key drivers of your business are shifting – helping you to better understand the risks and opportunities available to you.
We use our own economic model to generate economic scenarios for planning IFRS 9 and stress testing. Clients can access this tool to conduct their own “what-if” analysis.
4. How could businesses gain more value from economic information?
Currently, most businesses focus on headline economic information but beneath the surface, even in good times, there are always winners and losers. For example, job growth has largely been focussed on women and those aged 50-64, and house price growth is not uniform around the country. Our Economics Subscription Service aims to tell the story underneath the detail to help our clients avoid risks and take the right opportunities.
5. Finally, what would your advice be to those interested in purchasing a house in the current climate?
It’s pretty much guaranteed that you’ll get this question within five minutes of revealing you’re an economist! Prices are unaffordable for many but that does not necessarily mean that they are overvalued. Investors look at the rental yield on the property and for many, this is still attractive compared to the alternatives. Prices should rise gently in line with rent and incomes in the UK as a whole. The large capital gains of the past were made possible by a downward trend in interest rates and looser credit conditions – this is highly unlikely in today’s economic climate. A significant rise in interest rates could cut prices dramatically as there could be new legislation that increases the costs of buy-to-let investors.
It’s true that some regions will perform better than others given the differences in factors such as demographics and income growth so an understanding of granular movements in house prices is critical to many firms. 4most’s Automated Valuation Model (AVM) has been designed to help those organisations by providing them with accurate price estimates at property and sub-regional level.
For further information on our Economics services, please get in touch with Keith at keith.church@4-most.co.uk
