UK economic newsflow has been reasonably positive for the most part, according to Gerrards, but a qu...
UK economic newsflow has been reasonably positive for the most part, according to Gerrards, but a question mark hangs over whether corporate earnings will rebound in 2003.
Gerrards chief economist Simon Rubinsohn says the key problem for business at present is the general lack of pricing power. Because of this, any rebound in corporate earnings must be made through cost-cutting.
He adds: 'This statement is, of course, a little misleading to the extent that there are big areas of the economy in which companies are able to push up prices. But in aggregate it remains pretty tough.'
The UK National Accounts data does not contain an average measure of corporate price increases, he says, unlike the US, where it has fallen for four consecutive quarters.
Rubinsohn says: 'It may be that competitive pressures are less intense in the UK for various structural reasons. On the other hand, looking at the price trends in manufacturing and retail, the broad direction of the movement seems remarkably similar.
'Reflecting on this, we believe it is reasonable to assume there is currently little real pricing power across the whole of the UK economy.'
This suggests that any rebuilding of margins will be largely dependent on what happens on the cost side of the equation, he notes.
'Interestingly in the US, third-quarter numbers indicate that while prices may be falling, costs are declining even more rapidly,' says Rubinsohn.
'It is not difficult to fathom why this is the case. Productivity is continuing to grow at an astonishing rate. In the three months to the end of September, it climbed by a further 1.3%, taking the year-on-year rate of increase to almost 6%.'
However, he adds: 'None of this means there will not be a profits recovery in 2003. But against a background in which it is hard to raise prices, it suggests the upside to profits is likely to be fairly limited.'
Robert Waugh, head of UK Equities at Edinburgh Fund Managers, says the performance of the US economy holds the key for the UK equity market, even though the UK economy remains the strongest of the developed nations.
Waugh says: 'The UK continues to outperform its G7 peer group, having proved the most resilient of the major developed economies in this current global downturn.
'There has been a far more severe economic contraction in the US and eurozone. The gravity of Germany's economic problems, accentuated by having no direct control over its own monetary policy, has played into the hands of the eurosceptics.'
However, he adds, the current economic stability is not without risk, largely centred around fears of the next policy moves by the UK Government.
Waugh says: 'The Government's ambitious spending plans, funded from burgeoning public sector debt, raise the spectre of tax increases. The strength of sterling will continue to make life very difficult for the UK's exporters, while the threat of imported deflation should keep the lid on interest rates through 2003.'
UK valuations promising.
UK has best growth of G7 economies.
Equities look attractive versus bonds.
Risk from terrorist attacks and Iraq crisis.
Pricing power is too low.
Taxw may have to increase.
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