Fund managers believe the revised growth forecast for the UK, revealed in today's Budget, is still too optimistic and may not be an achievable target.
A downgrade was widely expected so markets did not react strongly when the Office for Budgetary Responsibility slashed its forecast from 2.1% to 1.7% for 2011.
However, Threadneedle’s co-head of UK equities Simon Brazier believes even 1.7% growth is still short of the mark.
“We only expect 1.4% GDP growth in the UK this year. We have been saying for some time the OBR’s forecast looks too optimistic anyway. We always thought there would be significant downside risks to the target.”
He expects there will be yet another readjustment in November when the forecast may be revised down lower.
“The bond market has got to believe those growth numbers will come through otherwise the deficit will grow quite substantially.”
MAM Funds’ Martin Gray also questions whether the downward revision to GDP growth went far enough.
“I think 1.7% is a more realistic forecast, although the UK may even struggle to make that,” he says.
Gray has limited exposure to UK risk assets such as equities and property but has some exposure to sterling, he says. Both Brazier and Gray say inflation is not a primary concern because it is driven largely by external factors.
“I do not believe 2% is the CPI inflation rate consistent with UK trend economic growth. Trend inflation is typically higher, but in the last ten years we have had inflationary pressure that has now unwound,” Brazier says.
Gray adds the main area to watch in the UK will be wage inflation.
“I do not think inflation is a problem as it is all external. The biggest thing for all of us to watch is if wage inflation starts to pick up, but we have seen no sign of that. Real wage growth has been negative for the last decade, which is not good,” he says.
“It is a combination of tax increases, energy prices, food and commodity prices – these are external factors which will drift away. I am in the low inflation, low growth camp.”
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