Andy Raikes

Market Outlook

UK Outlook

Outlook

Latest UK economic and market outlook. 

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In stark contrast to the rest of the world, US economic data has consistently disappointed over the past few months, as evidenced by the steep fall in the economic surprise index. This seems to have been partly catalysed by Trump’s failure to repeal Obamacare, which dampened expectations of the president’s ability to deliver a substantial fiscal boost to the world’s largest economy. Consequently, 10-year bond yields have declined substantially and are now back at 2.15%. That said, we are not pessimistic on US growth and think it is likely economic momentum improves from here. Trump desperately needs a political victory, and cutting taxes is one policy that the president and congress appear to agree on. Passing a bill before the mid-term elections is likely to become a priority. 

The euro area economy continues to enjoy a strong recovery. At 2%, the annualised growth rate in Q1 was double the OECD’s estimate of trend. Soft data such as business surveys remain at cyclical highs, signalling further improvement in hard data such as GDP over the coming months. Also encouraging is the fact that activity in the region is becoming better balanced, both by sector and country. Germany is no longer simply an export story, Spain continues its extraordinary recovery and there are even nascent signs of improvement in France and Italy. Whereas 12 months ago the euro area’s economic revival was based largely on a temporary consumer boost from cheaper energy, now the corporate sector is also playing an active role. With investment and capex picking up, we expect the euro area to post strong growth through 2017. We also expect European equities to continue to outperform, given the region’s strong earnings momentum, attractive relative valuations and improving political situation.

There have been several apparent amber warnings on the UK economy in recent weeks. For example, GDP growth in the first quarter was revised down to 0.2%, a marked change of pace from the 0.7% registered in the final three months of 2016. In fact, this is the first time in ayear that UK growth failed to outpace that of the euro area. The slowdown is partly the result of weaker consumer spending as higher prices eat into disposable incomes. Meanwhile, industrial production fell 0.5% MoM in March and UK house prices suffered their worst monthly decline since 2012 in April.

Falling commodity prices, tightening monetary conditions and rising bond yields have reignited fears that China’s financial system is heading towards a debt crisis. We continue to believe that a crisis is neither imminent nor likely, despite the rapid build-up of debt in recent years. That the Chinese authorities are choosing to remove some of their stimulus measures and tighten financial conditions is precisely because they now feel sufficiently confident in the growth outlook for the Chinese economy. Moreover, in stark contrast to other emerging economies that have suffered debt crises, China has little external exposure. Given that the vast majority of debt is domestically held and China still has $3 trillion in FX reserves, a debt crisis seems unlikely. Additionally, Chinese households have a very high savings rate of around 30%, compared to 5-10% in OECD countries. The stability of domestic deposits buys the government more time to solve the debt problem.

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