The UK is regarded as a safe haven in the world although recovery is unevenly spread throughout the ...
The UK is regarded as a safe haven in the world although recovery is unevenly spread throughout the economy.
The second quarter saw a growth recovery in the UK, according to GDP numbers, although improvement in the manufacturing sector is patchy and retail sales and consumer spending are starting to soften, according to Baird Equities strategists. The UK's Monetary Policy Committee continues to maintain interest rates in the face of US Fed cuts, though increasing public sector discontent with pay will increase the threat of wage inflation next year.
On the reverse side, there has been some concern the UK's recovery could be being hampered by deflation.
Rory MacLeod, global head of fixed income at Barings, thinks this threat has been overstated, however.
'What people need to remember is that many of the consumer price indices in Western countries consist of services industries, many of which are seeing price increases,' he says.
For deflation to occur, sterling would have to be seriously overpriced and the central bank would have to implement a very harsh monetary policy while at the same time house prices would have to fall. MacLeod thinks there is a secular upward pressure on house prices due to immigration and the decreasing size of average family units.
He continues: 'Having seen the impact of excess domestic capacity and a demand shortfall on the Japanese economy, Western governments are unlikely to let that happen here.'
The UK should be the strongest player in the OECD this year in terms of its domestic economy, according to Invesco Perpetual. As a result, the group feels it is a relatively safe market in spite of varied declines in the FTSE 100, FTSE 250 and All-Share indices. This is because strong drivers of growth remain in the country. Government spending, consumer resilience and the export market are supporting this trend.
Recent adjustments have brought the UK market into a more realistic position in terms of earnings forecasts and multiples, according to Baird. Nonetheless, global shocks will affect the local market and corporate profits do not look particularly secure for 2003.
In these circumstances, investors will sustain a defensive strategy, focusing on large-cap, good value stocks to the detriment of small companies. On the slightly longer-term issue of European Monetary Union, Baird thinks the economic case against the UK joining the euro is strong and should withstand the PR campaign in favour of EMU entry being waged by the British Government.
Tom Elliot, strategist at JP Morgan Fleming, says: 'With a large increase in public spending and a rise in consumer spending boosted by mortgage equity withdrawal, the UK economy remains relatively strong compared to other regions.'
'Economist now expects GDP growth for this year to be in the region of 1.6% and 2.7% for 2003. With inflation falling to just 1.9% in August, there is also scope for the Bank of England to further reduce interest rates if economic momentum is damaged in the months ahead by the difficult global environment. Financial markets have priced in a cut of at least 25bp by the end of the year.'
Interest rates could be cut again.
Markets pricing in 25 basis point cut.
GDP to grow in 2003.
Global environment continues to be hard.
UK deflation threat.
Retail sales beginning to soften.
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