The UK economy is not on the brink of recession yet, although the manufacturing sector has been hit ...
The UK economy is not on the brink of recession yet, although the manufacturing sector has been hit hard, according to fund managers.
Manufacturing output for the three months to the end of June decreased by 2%, falling for the second successive quarter. With the outbreak of foot and mouth aggravating matters, it came as no surprise that the sector is in recession, says global market economist at Gartmore, Jamie Lewin.
'Manufacturing has been experiencing difficult conditions for a while but this is not just down to the global slowdown,' he says. 'It started with the strength of the pound and the slowdown made things worse, as the sector was hit on two fronts.'
Manufacturing only accounts for 20% of Britain's economy. Moreover, the services sector is holding up well and Gartmore is factoring in 1.5% GDP growth for the UK this year, despite the strains in some sectors.
'There is a risk that other sectors might follow manufacturing with rising unemployment levels,' says Lewin, 'but consumer spending and wages are still showing upbeat figures. Consequently, the service industry is sufficiently strong to ensure that the UK economy does not fall into recession.'
Despite this, the Bank of England's report on the UK economy predicts gloomy times ahead. It says that, so far, the housing market and consumer demand have been strong but it anticipates dampening sentiment, with companies announcing redundancies and disappointing profit margins. While acknowledging difficult circumstances, head of UK equities at Aberdeen Asset Managers, Jon Thornton, is more bullish than the Bank of England.
He says: 'Corporate earnings growth is clearly under pressure as the economy slows and profit warnings are likely to continue but overall results remain broadly in line with expectations at the aggregate level. The level of overall growth for 2001 is still forecast to be reasonable by international comparison, particularly given the modest nominal GDP backdrop.'
In current market conditions, Thornton says, UK equities look extremely attractive versus gilts, with the gilt/equity earnings yield ratio at the bottom end of its 20-year range. Meanwhile, the UK remains relatively attractive from an international perspective.
'Clearly, corporate newsflow is likely to get worse before it can get better, particularly where there is exposure to the capex cycle,' he says. 'However, much of this should now be discounted, particularly outside the defensives.
'Meanwhile, the technical backdrop remains extremely supportive, with institutional liquidity at historically high levels, continued retirement of equity (via buybacks and special dividends) and further merger and acquisitions activity likely.'
While the defensive and value rally looks extraordinarily mature, he says, economic uncertainty continues to squeeze these stocks and sectors to relatively extreme levels, even though earnings are being downgraded in many cases.
• No recession for wider UK economy.
• UK technical backdrop supportive.
• Further merger and acquisitions activity.
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