Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

When does a recovery in the economy become an overheating of the economy?

That’s the question this morning after further evidence that UK plc is picking up serious speed, with attention now turning to possible action that could be taken to put the brakes on.

First was house price data from the Nationwide building society showing average prices rose 10.9% in the year to May, up from 7.1% in April. There’s been something of a perfect storm in the housing market over the past year with the Bank of England rate slashed at the start of the pandemic to its current record low level of 0.1%. That has helped to underpin ultra-cheap mortgage borrowing, fuelling demand.

Meanwhile, the Government’s efforts to protect industry last year included a new Stamp Duty holiday which removed the land tax on primary home purchases below £500,000. The holiday will begin to be phased from the end of June, creating an incentive for buyers to bring forward purchases if they can.

Finally, the pandemic itself may have pushed some people to accelerate their plans to move, adding yet more demand. The move to working at home - even if only partially - appears to have prompted a ‘race for space’ among homebuyers looking for a bigger home, according to Nationwide. Its chief economist Robert Gardner said: “Housing market activity is likely to remain fairly buoyant over the next six months as a result of the stamp duty extension and additional support for the labour market included in the Budget, especially given continued low borrowing costs, improving credit availability and with many people still motivated to move as a result of changing housing preferences in the wake of the pandemic.”

Rapidly rising house prices are beginning to put pressure on the Bank of England, whose job it is to control inflation and other risks in the economy. The Bank’s deputy governor Sir Dave Ramsden told The Guardian newspaper this week that: “There is a risk that demand (in the housing market) gets ahead of supply and that will lead to a more generalised pick-up in inflationary pressure. That’s something we are absolutely going to guard against. We are looking carefully at the housing market and a raft of real-term indicators.”

Inflation has been rising and is now running at 1.5% in the UK, still below that Bank’s 2% target. Should it continue to rise, however, the case for raising interest rates will get stronger.

The other economic data released this morning was the UK Manufacturing PMI. The index jumped to 65.6 in May, up from 60.9 in April and the highest since the survey began in 1992. Any reading over 50 shows growth. The fact that manufacturers are seeing such healthy demand will only add to the sense that not only is economic recovery well underway, but that there could be signs of overheating in some areas.

The current trajectory is likely to spark some nerves in the stock market, and some extra volatility is likely in the weeks and months ahead. It is not only the UK economy that’s picking up speed, or only the Bank of England considering whether to cool things down. The same story is playing out in the US as well.

If the market believes central banks will raise borrowing costs in response to rapid growth and inflation, that could be negative for share prices even if those are also signs of the recovery that we all want to see.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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